Why the proposed 10pc roof on mortgage is still too high for buyers

With an average home loan size at Sh10.9 million in 2017 repayable in nearly 12 years, very few Kenyans can afford to own a home through bank financing.

This is because one will need more than Sh100,000 monthly on average to service a mortgage even with the September 2016 legal ceilings on loan charges, which helped slash average interest rate for home loans to 13.57 per cent last year from 18.7 per cent a year earlier.

The average mortgage size has nearly tripled in eight years from just Sh4.1 million in 2010, statistics show, locking out more and more Kenyans from home ownership.

Commercial banks, which still rule real estate financing with a portfolio of Sh371.65 billion in 2017, have for years blamed the high cost of funds for onward lending, a complex legal and regulatory framework as well as collateral requirements for making mortgages exceedingly expensive.

A tedious land and property registration process has also been cited as a factor that continues to increasingly discourage aspiring homeowners out of the under-developed mortgage market with a paltry 26,187 accounts last year.

As part of the solution to unlock access to cheaper long-term funding by commercial banks, the Treasury is incorporating Kenya Mortgage Refinance Company (KMRC).

The proposed company will act as a vehicle to raise cheaper long-term cash from the capital markets, which will then be tapped by banks for onward advancing to prospective homeowners under the ambitious affordable housing scheme.

The Treasury plans to inject Sh1.5 billion into the non-deposit taking KMRC in exchange for a 20 per cent stake, while the remainder will be owned by commercial banks, credit unions and development finance institutions.

A number of commercial banks have joined the World Bank Group in committing to financially back the proposed firm, which is expected to offer attractive interest rates to lenders looking to finance beneficiaries of the State housing project.

The World Bank has pledged $160 million (about Sh16.11 billion), Co-operative Bank (Sh200 million) while Barclays Bank, Stanbic and Housing Finance have publicly shown interest in sinking cash into KMRC.

“With the establishment of KMRC, it is expected the institution will leverage on capital markets to raise funds through bonds for on-lending to banks and other mortgage financing companies and is, therefore, also a positive development for capital markets deepening,” Capital Markets Authority chief executive Paul Muthaura said in a speech last Thursday.

With market mortgage rate at less than 14 per cent, Housing and Urban Planning Principal Secretary Charles Hinga says banks which will access funds from KMRC will not be allowed to charge more than 10 per cent interest on home loans repayable in 20 years.

Equity stakes

The mortgages will, however, only be accessed by those earning Sh50,000 to Sh99,000 monthly under the classification by the Housing ministry for beneficiaries of homes under the 500,000-unit affordable housing plan by 2022.

Churchill Ogutu, a senior research analyst at Genghis Capital, an investment bank, said pricing mortgages as low as 10 per cent will largely depend on the amount KMRC will raise from banks, saccos and other institutions in exchange for equity stakes and additional funds through bonds sales to investors.

The availability of big-ticket, long-term loans by KMRC to mortgage providers will likely spur credit to homeowners under the low-cost housing plan, he added.

“Overall, I see the plan crowding in uptake of mortgage as access to mortgage credit has been a major hindrance. Thus, I see the plan will standardise the rate throughout the mortgage plan and smooth out the volatilities in payment,” Mr Ogutu said.

“Capping of the home loans at 10 per cent may, however, have some challenges to the mortgage lenders. Assuming, monetary policy tightens in the future above the fixed rate, repayments will be at a discount as opposed to scenario where market forces determine the mortgage rate.”

Banks may be reluctant to price home loans below what the government is offering for a risk-free debt of similar tenure.

The Treasury, for example, priced a Sh40 billion, 25-year bond at 13.4 per cent in June, returns which are likely to make it difficult for banks to advance house-backed loans at 10 per cent interest.

“When you talk about mortgage rates coming to single digits, there’s no way they can be lower than equivalent 20 or 30-year Treasury Bond rate. Why would you lend to somebody who’s got a higher risk than the government?” Barclays Bank chief executive Jeremy Awori said in an interview on August 14.

Home buyers under the low-cost housing plan will enjoy a 15 per cent tax relief on their gross monthly earnings while servicing mortgage.

Those earning between Sh15,000 and Sh49,000 will not qualify for mortgages even though they are eligible to apply for the low-cost houses under the State-backed scheme.

Prospective homeowners with a monthly income below Sh15,000 will qualify for social houses, composed of single- and double-rooms and sharing other amenities.

Kenyans who earn Sh100,000 or more in monthly income will not qualify to buy a house under the affordable housing scheme because they are classified in the high-income range.

Social housing

Houses under social housing schemes will cost a maximum of Sh600,000 for single room and Sh1 million for double room.

A one-bedroomed apartment under the low-cost units will be priced at between Sh1 million and Sh2 million, with a maximum of Sh3 million for two-bedroomed units.

The social housing schemes will largely be put up in colonial-era estates such as Makongeni (20,000 units), Park Road (1,640 units), Shauri Moyo (5,300 units) and Starehe (3,500 units) in the capital city Nairobi. Some residents have, however, raised objections to the plan.

“The location of the affordable homes will mainly be in the urban areas yet a number of the target market may prefer rural areas post-working life. This poses an obstacle in the housing agenda,” Mr Ogutu said.

For the low-cost houses plan, the government will service public land by sponsoring water, sewerage and electricity connection to about 7,000 acres of land, earmarked for the ambitious project, to attract private developers to build the houses.

“The issue has always been how do I exit. We have provided a very clear exit strategy in form of a put option that we have structured,” Mr Hinga said in a past interview.

“That put option essentially says build as long as you are within our development framework. Whatever you build that’s not taken, we (the State) are going to buy back.”