High interest rates main reason for seizure of houses

Rising loan interest rates. (Courtesy/iStockphoto)

I have been following recent media reports on how residential houses are topping the list of asset seizures by banks seeking to recover unpaid loans from clients. Such reports make first-time prospective homeowners shudder as the runaway loan interest rates may make it impossible to service a mortgage without fear of being auctioned.

Kristina, Nairobi

It is true that a section of residential home owners are risking auction over failure to service loans on time. They may have been paying their monthly installments on time until the recent increments on interest rates.

The Central Bank of Kenya (CBK) last year slapped borrowers with three rises in the Central Bank Rate (CBR), with the latest being in early December when it moved from 10.5 per cent to 12.5 per cent, the highest rate since September 2012 when it stood at 13 per cent.

The increased CBR led to interest rates going as high as 26 per cent in the banking sector, effectively piling pressure on customers, especially after the State rolled out the housing levy and enhanced compulsory savings for retirement.

Residential houses have topped the list of banks' asset seizures from clients against the backdrop of increased interest rates. There are court battles involving home buyers who have defaulted payments even after lenders allowed grace periods. Unlike before, however, banks are today compelled by law to sell off property of a defaulter at the highest market value.

Property that fails to register a specific market value cannot be sold for a song, therefore making it harder for lenders to recover debts. The lenders are therefore barred from selling property below 75 per cent of the prevailing market price.

Another nightmare for defaulting home buyers over looming increased interest rates is foreclosure.

For starters, foreclosure is a legal action whereby a bank or mortgage firm bars a client from settling the loan and takes over the property.

It comes into play when a prospective investor fails to pay agreed installments towards settling the mortgage. A foreclosure absolute order means the right of the client to settle the mortgage balance is revoked and property ownership transfers to the money lender!

However, the financing institutions must first apply for a court order, which involves two major processes.

First, they must apply in court for a foreclosure order nisi, which gives the client time to repay the debts and consequently redeem the property. The second process ensues after the client is unable to comply with the orders and a foreclosure absolute issued by the court.

- Harold Ayodo is an Advocate of the High Court of Kenya.