Mortgage refinancing is democratising home ownership in tough market

Homeownership is a part of Kenya’s socio-economic policy and remains one of the key priorities for the government.

This is even more relevant considering the trend towards rapid urbanisation, nuclear families, and ever-evolving aspirations of the Kenyan populace to climb up the socioeconomic ladder, especially in urban areas.

Housing costs and related incidental expenses consistently rank as the most significant household expenditure underscoring the need for innovative and affordable home ownership interventions within the housing ecosystem.

The government’s initiative of intervening in the affordable housing supply is poised to increase the stock of housing units but remains far from meeting demand.

Be it as it may, constraints on the demand side have also been glaringly existent, and in recent years, notable innovative interventions, especially mortgage refinancing, are gaining tremendous popularity in unlocking affordable home ownership.

Such interventions often overlooked or misunderstood revolutionise the ecosystem of home ownership, making it a more realistic venture for the majority of Kenyans who fall in the middle to lower income segments of the population.

Kenya Mortgage Refinance Company (KMRC) provides end-user financing, albeit through primary lenders (banks and Saccos), and we align it with what people need. In providing home financing we appreciate that housing is personal and that a home is a shield around a family, so it should be sized to match the family it is protecting.

The delivery of affordable housing has the potential to profoundly unlock domestic investment markets. Contributing to growth in multiple sectors including construction, manufacturing, and real estate finance, among others.

By providing long-term funding to primary lenders, KMRC addresses the asset-liability mismatch, a key constraint that primary mortgage lenders face. This mismatch arises because mortgages are usually characterised by long tenures, often spanning 15 to 30 years, while the funding used to finance these long-term commitments typically comes from shorter-term deposits, which can range from a few months to a few years.

This disparity creates a challenge for primary mortgage lenders (banks and Saccos), as they must constantly refinance or renew their funding sources to match the duration of their mortgage portfolios. Similarly, higher loan-to-value (LTVs) has been a key entry barrier to end-borrowers.

So how is KMRC making home loans affordable and accessible?

In response to this question, it is important to appreciate the two key issues that underpin any housing policy which are accessibility and affordability. Accessibility is matching what people require and what is available. Affordability on the other hand is the housing cost-to-income ratio which should generally be about 30 per cent or less.

So KMRC is transforming the housing market by firstly providing long-term funds with repayment periods of 20-25 years. This, we believe, is a game-changer! Before KMRC provided such funding, the average tenor of the mortgages in our market in 2022 stood at 10.9 years with a minimum of five years and a maximum of 18 years and based on the refinanced mortgages, the average tenor in 2023 stood at 12.33 years for commercial banks and 13.722 years for Saccos up from 10.25 years for banks and 11.63 years for Saccos in 2022.

The longer loan tenors significantly lower the debt burden by allowing borrowers to spread their repayments over a longer term, reducing the monthly repayment amounts and making homeowners hip more affordable.

Secondly, KMRC provides home loans at single-digit rates, which is less than 10 per cent. Through KMRC’s funding, the participating lenders provide single-digit rates ranging between seven to 9.9 per cent compared to an average rate of 17.0 per cent currently.

The KMRC single-digit rates reduce the borrowers’ burden in comparison with the high variable rates which are currently predominant in the market. Additionally, KMRC has introduced fixed-rate mortgages.

Over 88 per cent of loans in Kenya are on variable rates thus the introduction of fixed-rate home loans cushions borrowers against the upward shift in interest rate which has the potential of increasing defaults.

Lastly, KMRC has increased the loan-to-value ratio (LTV) from an average of 90 per cent to 105 per cent. This means the need to raise funds for down payments or deposits, which tend to be a barrier to entry has been eliminated. Borrowers can therefore access home loans with a lot of ease.

The writer is the Chief Executive, of Kenya Mortgage Refinance Company