How losing an income could cost you more than a house

In 2015, 33-year-old James Kimani was living the life many Kenyans aspire to. A fresh graduate from campus, Kimani had just landed a new job with a reputable commercial bank and moved in with his wife who was expecting their first child.

The couple took the next logical step that many young Kenyans starting out on their careers give priority. He bought a house, taking advantage of the bank’s staff interest rates.

The plan was to rent out the apartment, located in one of the city’s gated estates, and use the income to make repayments on the Sh5.5 million mortgage.

Two years later, however, Kimani’s world turned upside down when he was laid off by the bank. And now that he was no longer an employee, the interest rates on the mortgage spiked from the preferential three per cent to market rates.

This meant that to clear his mortgage, his monthly repayments would have to triple within the same repayment period, at the end of which he would have had to part with more than Sh21 million for the house instead of Sh6.8 million.

Despite a grace period of more than a year where he tried to land another job and resume repayments, the bank auctioned the house and listed him with credit reference bureau.

Kimani is just one of many Kenyans who are losing their hard earned money on the back of a depressed property market that is at the beginning of a self-correction, which is wiping out billions of shillings from once-lucrative investments.

According to the latest Kenya Bankers Association (KBA) property index, banks continue to struggle under the weight of the piling non-performing loans.

Central Bank of Kenya (CBK) also says the number of people that are unable to service their mortgages has been on the rise.

In its latest bank supervision report, CBK said default on mortgages increased 41 per cent in the year to December 2018 to Sh38.1 billion from Sh27.3 billion in 2017.

The rate of default on mortgages is much higher when compared to other bank loans, which stood at 12.3 per cent in 2018.

A mortgage officer working with a local commercial bank, who declined to be mentioned for fear of reprisal, said banks were under pressure to cut on the high non-performing loans.

“In the past, many banks were not as diligent in provisioning for mortgages as they are on personal loans,” he said. “Recently the regulator has been cracking the whip because the default rate on mortgages and property loans has been rising.”

Since mortgage loans are secured against the value of the property, banks often revert to selling off property whose owners have defaulted on payments.

The sky-rocketing property prices recorded over the past decade also meant banks were sure to regain their money with interest when they auctioned a defaulters property. They also got to keep all the installments paid up until the default date.

However, over the past two years, Kenya’s real estate market has been on a slump, with an oversupply of both residential and commercial property eroding earnings for developers and financiers.

“The sustained decline coincides with the rising distressed properties overhang,” said KBA when releasing the property index on Monday.

“This has further shaped market expectations and sentiments in a manner that buyers are unwilling or unable to pay the current asking prices and thus vendors are dropping their prices.”

This means the auctions being advertised each week are finding it harder to get buyers and even when they do, banks are no longer guaranteed to recover their full investments.

Linda Mokeira, a property consultant, said banks now need to wake up to the reality that they have to put on kids’ gloves to deal with defaulting customers.

“Banks may need to have a more human face in dealing with their customers and probably look at inducing them with interest rebates in case of job losses or loss of income,” she said.

“They can work on an arrangement where the borrower can pay off the outstanding principal through installments. This will give a win-win situation that the bank will be able to recoup its principal amount while the borrower gets their property.”

When the threats have failed to work, with the auctions themselves not being close to resounding success in terms of recovering their money, the lenders have resorted to cajoling their customers to pay.

HF Group, one of the largest mortgage lenders in the country, said it had been employing different tactics that ranged from assisting its customers with marketing of their property to jointly taking houses to auctions, which it said was a last resort.

Chief Executive Robert Kibaara said the bank was alive to the hard economic times that have battered Kenyans and it had opted to work with its customers in a bid to find a way out.

“We live in Kenya and understand the market is difficult. We understand that the customer is willing to repay the loan, but the circumstances might make it difficult,” he told Home & Away.

He said different tactics that HF Group had employed were aimed at ensuring a solution that worked   for a defaulting customer as well as the bank, enabled it to recover Sh3 billion in 2019, which had been classified as non-performing loans the previous year.

“It is always easier to work with someone. We just sit down around a table and agree the best route out of this. There are quite a number of people in distress, but we tend to go for auctions as the last resort,” Mr Kibaara said.

“We have been very successful. Just to paint a picture, last year, from our non-performing loans, we were able to collect Sh3 billion largely from these alternative ways of solving the problem.”

As at December 2018, HFC – HF Group’s banking arm – reported Sh5 billion as mortgage non-performing loans, in a year when the banking industry was hit by high rates of defaults, according to CBK data.

Other than assisting distressed clients with marketing, Kibaara said the bank has been restructuring loans to enable customers keep up with payments.

“Where the customer’s flows are slow, we rework the loan in terms of repayments to fit the customer’s current flows. We work with customers jointly to market their properties, for instance where a customer is selling, we take up the marketing as we have a strong selling arm… we are able to do good marketing and get discounts especially when we have volume,” he said.

“We also work together to sell the property even in an auction. We decide to take the property jointly to auction in a collaborative way. When we sell, you get your money and pay the bank back.”  

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