High rates stoke fears of housing crisis

Elizabeth Ngigi, an auditor, took a Sh5 million mortgage two years ago to buy a three-bedroom house in Kahawa Wendani, in the outskirts of Nairobi.

The interest rate for the facility was 10 per cent, which means she was paying a monthly instalment of Sh53,730. She would have paid Sh9,6071,466 at the end of the 15-year mortgage.

Ordinarily, that was affordable for the 27 year-old who earns a net salary of Sh80,000. But now it’s not.

At the end of last month, the bank sent her a note — the fourth since she took the facility — saying it had adjusted the lending rate to 23 per cent, pushing her monthly repayment to Sh99,083.

A quick calculation shows she would have paid Sh17,834,970 — more than triple the amount borrowed, assuming the rates remain at 23 per cent — after 15 years

“I’m left holding on a loan which I can no longer afford. I regret it” Ms Ngigi said.

The steep rise in interest rate has come as a shocker to Kenyans whose spending habits were shaped by years of relatively low cost of borrowing. Each increase of 1 percentage point in rates adds as much as 10 per cent to the total cost of a home, real estate analysts said.

These are the realities facing at least 16,000 Kenyans with mortgages. Rising lending rates have significantly pushed up the cost of mortgage, making it unattractive to both existing and potential customers.

“If the raise is sustained for more than six years, then banks are in for some defaults,” said Mr Kabaki Wamwea, a director at County Developers, a real estate firm putting up houses in Ruaka, Nairobi.

“Mortgages remain a critical option in the real estate sector and no economy can expand home ownership without it. We are seeing the rise in lending rates as a temporal trend.”

Central Bank of Kenya (CBK) last week increased its indicative lending rate to 18 per cent, prompting banks to take cue.

Housing Finance, for example, raised its lending rate to 23 per cent for new clients and 16.5 per cent for existing customers, up from 14.5 per cent.

The surge in mortgage rates has mostly affected those who are holding variable and part-fixed rates arrangements. For variable mortgage rates, a bank can adjust the rates as it may determine and repayments are adjusted similarly.

For part-fixed mortgage rates, repayment is at a defined rate for the first 1 to 5 years and may be renewed on expiry.

Most lenders ask for at least 10 per cent of the value of the property — as down payment. Others ask for as much as 5 per cent of the value of the property for mortgage processing, while legal fees and commitment fees gobble up another 7 to 9 percent of the value of the property.

Ms Ngigi paid about Sh1.1 million before the mortgage could be approved.

The first time the bank raised the rate to 13 per cent, she thought that was the worst it could get. This automatically pushed the monthly repayment to Sh63,262 (she would have paid Sh11,387,179 at the end of the 15 years.)

At this point the cost of the house doubled while its value or rental income would ordinarily not have risen by that margin.

A further surge in the lending rate to, say, 30 per cent — which market analysts see as just months away should the CBK continue to pursue the high interest regime — would increase the monthly instalment to Sh126,485.

The total amount payable after 15 years will have accumulated to Sh22 million — four and a half times the value of the house when Ms Ngigi first applied for the mortgage.

“We have had to raise our rates. But we don’t want the loans to go bad. We are holding discussions with our clients to see how best we can approach this issue,” said Mr George Laboso, head of mortgages at Family Bank.

The bank has since August given mortgages worth at least Sh1 billion.

“We are telling our customers we are ready to extend the period from, say, 10 years to 15 years to reduce the burden on them” Mr Laboso said.

But will house prices keep rising to make sense for people like Ms Ngigi to hold on?

At present, demand for housing in urban centres has outstripped supply by at least five times, according to the Kenya National Bureau of Statistics (KNBS). This has led to high house prices, locking out low and middle-income earners from owning homes.

Less cash for investing

But economists and real estate analysts warn that if CBK continues to raise interest rates to check inflation and stabilise the shilling, Kenyans’ purchasing power will fall, and people will set aside more money for basic goods, transport and school fees.

This would mean there will be less cash for investing in the real estate sector. Developers will have to push the cost of homes down to sell and that is where mortgage holders like Ms Ngigi will be dealt the real blow — the value of the houses they acquired at an inflated cost will start crumbling.

“We are projecting a slowdown in the mortgage business due to the high interest rates,” Mr Laboso said.

A real estate pricing boom has pushed the cost of homes to more than 140 times the annual incomes of most Kenyans, according to a survey of Africa’s housing market in March.

“In the era of high interest rates, the best strategy for potential home owners is to save more to raise a higher deposit of let’s say between 30-40 per cent” said Mr Wamwea, adding: “One can then seek a bank loan for the balance and this would be less painful.”