For the better part of last year, the Kenya Mortgage Refinance Company (KMRC), implemented a raft of measures that were meant to encourage the uptake of mortgages and boost home ownership.
In September for instance, having initially only provided refinancing to its shareholder banks, the KMRC broadened its refinancing to non-shareholders such as SACCOs and microfinance institutions. By broadening the refinancing, smaller financial institutions would be able to offer their clients, a majority low and middle-income earners, long-term, lower-interest mortgages.
KMRC would offer the lenders loans at an interest rate of 5 percent, allowing them to pass on the benefit to end consumers, who would now be able to access mortgages at rates as low as 9 percent.
Earlier in the year, the KMRC had increased the monthly income of eligible borrowers from Sh150,000 to Sh200,000, in an effort to increase the uptake of mortgages in the country. The firm had also increased the maximum amount that can be accessed for the Nairobi Metropolitan Area from Sh8 million to Sh10.5 million and for the rest of the country from Sh6 million to Sh10.5 million.
In spite of these actions however, the number of mortgage accounts in Kenya remains low, with data from the Central Bank of Kenya (CBK), showing that there are only slightly above 30,000 mortgage accounts in the country.
Doreen Onwong’a is a real estate lawyer and partner at KN Law LLP.
Photo credit: Pool
Doreen Onwong’a, a partner at KN Law LLP, attributes this to the several costs associated with acquiring a mortgage, which have made it difficult for young people and low paid workers in particular, to enter the market. Even though they all serve a purpose, these costs, which may include commitment fees, survey costs, arrangement fees, broker fees, lawyer fees, telegraphic transfer fees, deeds release fees and solicitor’s charges, tend to inflate the overall price of the mortgage.
“When some brokers approach potential clients, they tend not to disclose all the costs associated with the mortgage process. That is why you hear people complain about hidden costs after approaching a bank,” said Doreen in an interview with DN2 Property.
Before a bank issues a mortgage, they may, for instance, assign a valuer, whose fees are covered by the mortgagor, to do a valuation of the property and provide a valuation report to help determine the pricing of the mortgage. They may also assign a lawyer, whose fees are also covered by the mortgagor and not the bank. If the mortgagor wishes to have another lawyer go over the documents on their behalf, they have to pay them a particular fee as well.
Additionally, if one is purchasing a unit from a developer in an off-plan arrangement, they have to pay the developer’s lawyers a handling fee.
“Lawyers are crucial because they help to safeguard both the buyer’s and the lender’s investment as well as prevent future disputes, but remember, it is the buyer who will have to take money out of their pocket to pay the legal fees,” explained Doreen.
There is also an insurance fee, included in the overall cost of the mortgage, to ensure that the remaining balance of the loan is paid in the event of demise or serious injury to the mortgagor. One also has to pay stamp duty to the government, which is higher when the mortgage is for a unit that is outside the affordable housing program, whose mortgages are slightly waivered.
“In addition to disbursement charges, this stamp duty, which can in some instances account for up to four percent of the property’s value, significantly balloons the overall cost of the loan,” remarked Doreen.
The conveyancing practitioner also points out the cost of time which many mortgagors often do not anticipate when signing up to the mortgage process, as a challenge that they face.
“When buying from a developer for example, a delay from the bank could result in an increase in the overall mortgage price due to an extension of the wait-time involved in the construction,” said Doreen.
More so, a surge in the prices of construction materials, which commonly happens in Kenya, could affect the selling prices of houses and by extension, the cost of mortgages. For housing finance to be effective, Doreen says that those seeking to be home owners have to be motivated to invest in homeownership.
Correctly structured finance systems could help to deliver improved housing for all. However important they are, since most costs in the mortgage process are met by the mortgagor, Doreen urges that they should be waived or reduced to such a level that they do not over-burden them.
Before a bank issues a mortgage, they may, for instance, assign a valuer, to do a valuation of the property and provide a valuation report.
“Institutions that offer mortgage finance should foster the policy of providing incentives to potential home buyers in order to enable them access mortgage finance,” remarked Onwong’a.
If the country is to bridge the current housing deficit, the conveyancing practitioner also points out that the creation of structures that will guarantee more equity in the disbursement of mortgages, will be crucial. This entails creating a framework that will ensure consistency in the interest rates applied on loans and implementing mechanisms to ensure that this framework is adhered to by the lenders.
At the expense of disadvantaged borrowers such as those who are not in salaried employment, banks have been giving varying rates for similar levels of loans depending on the level of risk for a particular customer and the market forces of demand and supply.
“It is no surprise that one can negotiate for a two million loan at a subsidised rate, and another person gets the same amount of loan from the same firm at a higher rate but at different times,” said Doreen.
This endeavor by the banks to minimise their risk has not only disproportionately affected borrowers who are not in salaried employment, but also those who work in firms with smaller turnovers.
“If you are in a blue-chip company, banks will be camping at your door, but if you are employed in a small business, it may not be very easy to access a loan.”
Michael Kiruti, who runs Kiruti and Company Advocates, agrees, adding that the challenge with provision of housing has not been building or lack of demand, but access to financing to buy homes.
“Recently, the CBK lowered the base lending rate, but are we going to see more lenders willing to take a risk and reduce their interest rates?” posed Kiruti.
Because Kenya does not have a fixed mortgage rate, where the interest paid at the time of loan acceptance is set until the loan is repaid, Michael says Kenyans have continued to avoid mortgages.
“Even if people are able to qualify for mortgages, many are not able to afford the monthly repayments. This not only affects the overall demand for mortgages, but also the volume of transactions within the housing market,” said Kiruti.
Government interventions, such as the provision of incentives and advantageous loans through state-owned banks, could help to bridge the financing gap.
“The KMRC for instance was a good intervention, as it enabled even those people who were not in salaried employment to build a credit history and thus boost their chances of accessing credit at a lower rate,” noted Kiruti.
If the country is to bridge the current housing deficit, it will be crucial to create structures to guarantee more equity in disbursement of mortgages.
The market can also be stimulated by providing tax reliefs for affordable housing developers or first-time homeowners. For instance, tax reliefs on building supplies or deductions for mortgage interest payments might lower the total cost of home ownership. Whether by design or not, Kiruti further adds that limited information on mortgages, has made it difficult for prospective homeowners to understand this mode of financing, let alone explore it as a tool to purchase a home.
“Obtaining a mortgage is a complicated process that involves many procedures from identifying the best service provider with the best interest rates to settling your final premium,” remarks Kiruti.
Unable to fully grasp the consequences of missing payments or the effect that variable interest rates can have on their monthly obligations; those who get the mortgages tend to experience difficulties in meeting their obligations.
“Developing public education campaigns about mortgages, their advantages, and the home-buying process could boost confidence and decrease apprehension around mortgage adoption,” stated Kiruti.
Players in the mortgage industry could also work to innovate new products, and diversify their product range to include those segments of society that have previously been underserved.
“One way of tackling affordability is by designing products where the cost of the loan is spread out more evenly over the lifetime of the loan. This in turn will capture the low-income earners,” remarked Kiruti.
If one would like to apply for a mortgage but is new to the process, Silvia Simiyu, who works at Kiruti and Company Advocates, advises that they should first ensure that they understand the total cost of the mortgage. This goes beyond interest rates as it is just one component of the total cost. Extra fees like processing fees, insurance costs, valuation fees, and loan protection premiums can increase the total cost.
“A detailed analysis of all expenses related to obtaining and keeping the mortgage should always be requested. Any fees that may not be immediately apparent should be taken into account,” urges Silvia.
She says that it is also important for the borrower to consider the impact of inflation and interest rate increases. Many lenders offer fixed interest rates for a few years, but after that, the rates could increase.
“If inflation rises, the actual cost of your mortgage may end up being more than you anticipated. It is important to make sure that a person is comfortable with the worst-case scenario in terms of repayment increase,” said Silvia.
If the loan is of a variable rate, one ought to calculate the maximum amount that they could end up paying if rates go up by a few percentage points. Silvia also says that it is important for first-time borrowers not to overstretch their budgets.
Lenders may be willing to offer a mortgage larger than what is comfortable for the person taking out the mortgage, based on their income and credit score, but this doesn’t necessarily mean it’s a good idea.
“Before committing to a mortgage, assess financial goals and expenses as well as cash flow. A good rule of thumb is not to spend more than 30 to 35 percent of the monthly income on housing-related costs,” noted Silvia.
The length of the loan and the total interest payable are other important considerations that one should take into account, before signing up for a mortgage. At the onset, though a 25 or 30-year loan might appear cheaper because of its lower monthly payments, it could be more expensive than a shorter-term loan due to the interest accrued over time.
“Monthly payments for shorter-term loans are typically greater, but the total cost of interest is much lower. To save money on interest over time, one might want to think about taking out a shorter-term loan if they can afford the higher payments,” counsel’s Silvia.
