Mortgage market will not grow if interest rates remain high

The uptake of mortgage is unlikely to rise in the country in the near future if the high interest rates persist.

The country’s benchmark interest rate currently stands at 10 per cent, while the average interest charged on a mortgage loan is about 15.4 per cent, according to the Central Bank of Kenya’s website. However, some commercial lending institutions charge as much as 19 per cent.

“Kenya currently has 22,000 mortgages, and we should not expect to see this number rise if interest rates are not reduced to single digits to favour the larger market, which includes the larger middle- and low-income earners,” says Mr  Kariuki Musa,  chief executive officer of Gakuyo Real Estate.

“As developers, we have had to change our priorities to suit our target market because building houses to sell on mortgage is no longer a viable option,” he adds.

Mr Kariuki says many people are not keen to get mortgages, so they prefer to make a down payment and clear the rest of the amount in instalments, build incrementally or save in a sacco and then get a loan to finance construction.

In response to this reluctance among the public to take mortgages, developers have come up with ways of providing investment options that suit their target market.

This has seen some of them resort to building incrementally rather than building to sell on mortgage for fear of ending up not having people buying their houses.

“Many potential homeowners are wary of committing a large proportion of their earnings to paying mortgage instalments every month — for as many as 30 years — and facing the risk of not being able to invest in anything else.

REQUIRED TO PAY MORE

Besides, they are required to pay more when market conditions change and result in an increase in interest rates, not to mention the risk of losing their investment altogether if they default on payment,” Mr Musa explains.

Indeed, there are many uncertainties in life, such that even if one gets a mortgage at the lowest interest rate, the vagaries of market conditions such as fluctuations in the value of the shilling, or inflation, are highly likely to raise the monthly instalments as most of these loans are not fixed.

There is also no guarantee in employment, so there’s the additional risk of losing the property if one loses their job and defaults on payment.

It is such risks that make many people avoid mortgages and seek  avenues that allow them to own homes without the hassle of repaying exorbitant amounts every month for the next 30 years, says Mr Musa.

For instance, the minimum one can expect to pay for a starter house in Nairobi, normally a two-bedroom apartment on the outskirts of the city, is about Sh4.5 million. For that amount, one would have to make monthly mortgage repayments of about Sh36,000 at the current average market rate of 16 per cent. This is too expensive for most Kenyans, says Mr Musa.

The cost of land, as well as that of buying construction materials and labour are already very high, and when developers include their profit margin, this only further pushes up the cost of a house, which makes buying a house on mortgage prohibitive.

At the moment, houses being sold on mortgage in the market cost between Sh7.5 million and Sh20 million, which is way beyond the means of most ordinary Kenyans.

When you compare this to a situation in which a potential homeowner buys land and builds incrementally using a sacco loan at an interest rate of two, or even one, per cent, it is not surprising that many are opting to go this way and building at a pace that does not financially constrain them, and helps them avoid the stress associated with repaying a mortgage, says Mr Musa.

This also shields such homeowners from having to deal with fluctuating interest rates that make the monthly instalments more expensive, he adds.

“I have interacted with colleagues in the financial sector who understand the modalities of mortgage financing in Kenya more than the ordinary Kenyan would, and they earn six-figure monthly salaries yet they are wary of taking up mortgages,” Mr Musa reveals.

DISADVANTAGED

“Mortgage takers are disadvantaged as they have a lot to lose. The mortgage market in Kenya is packaged to suit the very rich because even if one is earning more than Sh150,000 in gross pay, they will find it difficult to keep up with the monthly repayments,” says 29-year-old Chrispine Karuri,  a financial controller.

One has to earn around Sh200, 000 or Sh250,000 in gross pay every month to comfortably repay a mortgage loan, he adds.

“If a person earning a gross pay of Sh150,000 per month were to take a mortgage loan of Sh5.5million at the rate of 16 per cent from a commercial lender for 10 years for a two-bedroom house within Nairobi, they will be repaying around Sh88,000 every month.

If the interest rates were as affordable as they are in some developed economies, where single-digit rates of as low as three per cent are offered, the monthly repayments would be in the region of  Sh16,500 every month,” he explains. 

“If I were to analyse and take a deeper look at such mortgage repayments in terms of cash-flow as a budget-cautious individual, I would ask myself whether I would be comfortable parting with Sh88,000 every month for the next 10 years in mortgage repayments,” says Mr Karuri.

Like Mr Musa, he notes that life is full of uncertainties, such that even job security cannot be taken for granted since changes in or outside the workplace can cause one to lose their job suddenly, especially in the private sector.

“I would also not want to be in a position where I cannot do anything else after repaying my monthly mortgage,” says Mr Karuri.

For instance, an accident or sickness might render one physically handicapped or bed-ridden and thus unable to work to earn an income, making them default on payment. Some sicknesses might also drain a person’s finances, making it impossible for them to continue with their mortgage repayments, he notes.

There is also the possibility of political upheaval, as happened during in the 2007/2008 post-election violence which, while it might not necessarily affect one’s job, can greatly affect how one uses their money. For instance, one might suddenly find themselves in a situation where they are forced to support extended family members, adds Mr Karuri.

What is more, there is the possibility of losing the house if one defaults on repayment, not to mention the risk of not being refunded the money one had paid, or being involved in lengthy legal battles in order to get a refund of the money paid, he adds

Mr Musa  says that mortgage financing in Kenya is very biased as billion-shilling investors can negotiate interest rates as low as single digits whereas the ordinary Kenyan who wants to own a  home through mortgage financing could end up paying the highest rates, sometimes as high as 21 per cent.

But there some lucky corporate staff who enjoy cheap loans from banks that charge less than the standard-base rate set by the Central Bank of Kenya, known as the Kenya Bankers Reference Rate (KBRR).

“The current mortgage interest rate of 16 per cent is very expensive and I would not have opted for one had I not been given a negotiated rate of four per cent by my current employer, says Mr Charles Ledama, an internal auditor.

“If I were to get a mortgage loan of Sh13.5million from the mainstream commercial lenders to be repaid within 20 years, I would be repaying around Sh108,000 every month for the next 20 years. However, at the negotiated rate of four per cent, I will be committing around Sh27, 000 in monthly instalments. This makes a very big difference and constitutes substantial savings for me,” says Mr Ledama 

“It really is funny that when one wants  a mortgage in Kenya, they cannot afford it on their income and when one’s income allows it, they do not need it because they have other options,” says Mr Karuri.

He says he would rather take a short -term unsecured loan where he does not  have to have an asset attached to the  loan and risk it being repossessed if he default on payment.

“I do not dispute that this might cost me more because such loans are pricier, with interest rates that could range as high as 21 or 22 per cent, but the fact that it is for a shorter period means that the uncertainties are reduced to a shorter extent,” says Mr Karuri.

PRONE TO CHANGES

 Mortgages are long-term commitments and if one is not ready and able to commit, I would advise against it because the fluctuations in interest rates will more often result in higher monthly instalments, and coupled with other personal economic uncertainties, may result in stress, says Mr Ledama.

Mortgage rates and other personal loans from mainstream commercial lenders are regulated by the Central Bank of Kenya and are prone to changes occasioned by market conditions.

Kenya’s financial system is wholly integrated, such that if one aspect of it changes, the ripple effect is felt in other sectors of the economy. For instance, when the dollar rate is high, the Central Bank increases its base lending rate, and subsequently, other rates  also go up.

When this happens, banks get a more viable investment option in the government at the high rate. Because the government borrows from the same commercial banks that ordinary Kenyans also borrow from, the banks will give preference to lending the government at the expense of the ordinary Kenyan as it is considered a low-risk borrower, says Mr Ledama.

“The financial sector is a free market that does not have controls and even when the Central Bank provides a base lending rate, banks will still go overboard to make exorbitant profits.

They will point to market conditions, which may be vague, as the culprit, because borrowers will not understand them. There is an element of dishonesty and a desire to make more money among banks,” says Mr Musa.

Mr Ledama believes that financial lenders are also affected by these market conditions, especially when the rates go up.

“A problem in the economic market affects all others by default,” he says. “Policies of regulation would also not work for mainstream commercial bank lending because they will just opt out if they feel that the rate would not work for them.

If commercial banks were also regulated to work within a set rate, many would prefer to disregard the mortgage product because it would be a loss to them, says Mr Ledama.

“I think people who can afford mortgage financing in Kenya at the current high interest rates are Kenyans living in the diaspora, who have more disposable incomes, and the very rich,” says Mr Karuri.

In any case, mortgages are not the only loans people take as they might also have  car loans and other family expenses,  and should thus not be the only investment one makes in their lifetime. It is, therefore,  imperative for one to ask themselves whether they have money to spare after the mortgage repayment.

 After making all the financial deductions from their incomes, most people cannot afford mortgages, says Mr Karuri.

Meanwhile, Mr Ledama says mortgages are not for the middle class, given that in the current economic times, one cannot take anything for granted.