What you need to know about mortgage and home ownership

Home ownership in Kenya has remained relatively low at 21.3 per cent in urban areas compared to other developed countries such as South Africa at 53.3 per cent.

The relatively low rate of home ownership in Kenya is attributed to; high property prices, high initial transaction cost such as the initial deposit required to access mortgage, lack of credit risk information for those in the informal sector leading to their exclusion, high interest rates for mortgage loans, lack of real estate finance to fund large scale developments, and low income levels which has made it hard to service loans.

The Kenya housing market provides home buyers with an array of home financing options among them; bank loans, personal savings and loans from Saccos. Currently, the most common method is personal savings.

Effie Otieno, a real estate and research analyst at Cytonn Investments, shares on mortgages for home financing. 

Mortgages are one of the least popular methods of home financing in Kenya with an approximate market share of 6.0 per cent of all sources of home financing according to Kenya Bankers Association (KBA).

Mortgages are legal agreements by which financial institutions lend money for purchase of buildings often residential properties at an interest in exchange of taking title of the debtors’ property. They are provided with the title of a property as a collateral and ownership is transferred to the individual taking the loan once payments are completed. The financial institutions usually determine how the payment of the mortgages will be made and failure to commit to payments of the mortgages may lead to foreclosure.

As mentioned earlier, the Kenyan market has recorded relatively low mortgage uptake with approximately 26,504 accounts as at 2018 out of an adult population of more than 24 million.

The low uptake of mortgages is currently attributed to relatively high interest rates averaging at 12.0 per cent as of 2020, the relatively high deposit requirements, unavailability of long tenors making the terms unfavorable for majority of the households amid low income levels, strict underwriting rules by banks especially when lending to the informal sector, and the relatively high property prices.

Additionally, the average mortgage loan size decreased from Sh8.52 million in 2017 to Sh8.48 million in 2018 as banks tightened credit standards to the mortgage market.  In Kenya, currently banks are the main providers of mortgage financing, according to the Central Bank of Kenya, Banking Sector Annual Reports, 2018, about 76.1 per cent of lending to the mortgage market was by 6 institutions similar to 2017.

Most financial institutions are reluctant to expand their mortgage portfolio attributed to low supply of long-term capital due to limited access to capital markets funding, asset-liability mismatch by tenor due to the relatively long-term nature of mortgage loans and short-term nature of bank deposits, limited credit risk information especially for those in the informal sector, and, complex legal and regulatory framework as well as collateral requirements making mortgages exceedingly expensive.

In a bid to enhance home ownership and boost the mortgage market in Kenya, the government, through one of its Big Four Development Agenda on affordable housing, prompted the establishment of the Kenya Mortgage Refinance Company (KMRC) in 2018. The facility lends to Primary Mortgage Lenders (PMLs) at an annual interest rate of 5.0 per cent, thus enabling them to write home loans at 7.0 per cent lower than the market average rate of 12.0 per cent.

In addition to offering relatively long tenors of up to 25 years, compared to the market average of 12 years. 

The facility has two main types of loans, the first one is the affordable housing loans capped at Sh4 million in major towns such as Nairobi, Kiambu, Machakos and Kajiado and Sh3 million in other towns.

The second type of loan is the market housing loan which has a limit of above Sh4 million. KMRC, which began operations in September this year targets to grow the mortgage accounts from the current 26,504 to 50,000 mortgage accounts within five years.

When taking up a mortgage, it is important to consider;

I. Budget: It is important to consider the loan size one can afford when looking to secure a mortgage, this helps in ensuring that one takes up a mortgage they can comfortably service given their financial capability thus avoid defaulting;

II. Having a good credit score: When applying for a mortgage, having a good credit score is a huge advantage as it increases the chances of qualifying for the loan as opposed to a borrower with a negative credit score,

III. Having savings for down payment: Most mortgage loans are not fully financed. a deposit needs to be made once an individual qualifies for a loan. It is important to save up for the down payment to easily access the amount of loans applied for. This will also help in limiting delays and increase confidence of the facility providing the loan,

IV. Exploring affordable loan options and having the right lender: Having affordable loan options ensures access to loans at favourable interest rates compared to other options provided by primary mortgage lenders. It is also important to have the right lender with an overall good reputation and favourable terms and conditions,

V. Ensuring compliance once the mortgage has been taken: This is important in ensuring that the property that was used as a collateral is not seized in the long run due to instances of loan defaults.

Home ownership in Kenya has been relatively low compared to other countries mainly due unavailability of affordable financing options. It is therefore of essence for potential home owners to explore different sources of home financing like mortgages especially with the recent operationalization of KMRC and this will enable them access funds to facilitate their home purchases. An improved mortgage market is essential for the improvement in home ownership in Kenya.

Dr Pesa is Effie Otieno (pictured), a real estate and research analyst at Cytonn Investments.