Earning less than Sh150,000? Forget about mortgage

After visiting financial institutions at the recent Kenya Homes Expo at Nairobi's KICC, Ferdinand Mwongela concludes that, indeed, mortgage is still a rich man’s dream.

There has been an increase in the number of people taking out mortgages to buy or build houses. For example, in February this year, a Central Bank of Kenya (CBK) survey showed that as of June 2010, there were 15,049 mortgage loan accounts with outstanding mortgages standing at about Sh61.4 billion. This showed a growth from Sh19 billion only four years earlier, in 2006.

Another report in November last year also showed that as of May that year, the number of new loans had grown to 2,966, also quite impressive.

What these reports do not tell you, however, is that all ‘this growth’ is but a drop in the ocean, in the face of a growing need for housing projected to hit epic proportions by 2050. Majority of the population still cannot dream of a mortgage and have resigned to paying rent for the rest of their lives.

National Housing Corporation (NHC) Managing Director James Ruitha points out that it is necessary for the housing sector to look out for the middle income earner. According to him, when the middle-income class is unable to afford houses, they go for those targeted for the lower income cadre thus displacing them. This creates a ripple effect that ends in the creation of informal settlements.

Interest rates

"If you ignore this, you are looking for trouble," Ruitha says.

Yet developers are not the only ones in danger of ignoring this class. Touted as one of the best ways to acquire a house, mortgage financing in Kenya excludes the larger majority of the ‘middle class’ with some banks asking for a monthly net income of Sh100,000 to qualify for one.

The pace at which interest rates have been coming down is, however, commendable. Assistant Minister for Housing, Margaret Wanjiru has commended this drop but expressed hope for further reduction.

Barclays Bank has its interest rate pegged at 11.99 per cent. They require you to commit up to 50 per cent of your net income to the repayment of the mortgage loan. They also finance up to 90 per cent of the value of the property. This means that if you are interested in a house in Kitengela, which costs about Sh5 million, you will pay a monthly installment of Sh71,707 for a period of ten years. You can also pay Sh59,979 for 15 years or Sh55,019 for 20 years — the maximum repayment period for the bank.

Out of reach

For anyone with a gross salary of Sh100,000 such an undertaking in Kitengela might prove a handful. When I casually informed the official at the Barclays Bank stand that I was working with a net salary of Sh50,000, she smiled and kindly asked me to consider a personal loan. Considering that millions of Kenyans do not even dream of a monthly income of Sh50,000 (whether gross or net), owning such houses remain but a mirage.

At the Equity Bank stand, salaried borrowers have a slight advantage attracting an interest rate of 13.75 per cent against the 14.50 per cent of their business borrowers. The salaried also attract a financing of up to 95 per cent of the value of the property while the business borrower gets a maximum of 85 per cent. At 14.50 per cent, a Sh5 million mortgage would attract monthly repayments of Sh64,000 for 20 years.

The Kenya Commercial Bank’s mortgage division, S&L will still require one at 13.5 per cent interest rate to pay upward of Sh60,368 for 20 years for a Sh5 million loan.

According to Simon Walley, senior Housing Finance specialist with the Word Bank, KCB and Housing Finance (HF) together command over 50 per cent of the mortgage market.

The Standard Chartered Bank, one of the largest banks by asset base, offers the lowest interest rates at between 9.9 to 12.9 per cent and they can finance up to 90 per cent of the value of your property.

I decided to dream ‘small’ and talk of constructing a house in Nairobi’s Utawala. I walked to HF’s stand at the expo. Here, home purchase or construction for owner-occupier is financed at a maximum of 90 per cent of the value of the property. They promised to turn my now small dream into a house with a nifty package called Makao.

With this product, HF partners with you and builds the house for you from a pre-select design. The designs on display cost between Sh1.077 million and Sh21.868 million.

Makao’s Maendeleo bungalow, a choice of between two and three bedroom houses at Sh1.077 million and Sh1.63 million, was the best bet assuming you had the land and all the necessary approvals. A Sh1.5 million mortgage would be repaid at monthly rates of Sh34,902 for five years, Sh23,290 for 15 years and Sh18,652 for 20 years.

Obstacles

Despite the friendly rates, few can afford to take mortgages. Some of the things blamed for this are high interest rates and low-income levels. CBK’s survey on the country’s mortgage finance listed lack of access to long term finance as one of the major constraints, according to respondents polled, with high interest rates coming fourth behind low income levels and credit risk.

However, the local mortgage market continues to receive support, with the World Bank’s International Finance Corporation set to loan KCB Sh8.8 billion to go towards supporting its mortgage business in the East African region. Though not present at the Kenya Homes Expo, CFC Stanbic Bank recently announced a 100 per cent mortgage financing, relieving clients of the need to raise some of the cash towards the purchase of a property. Such clients, however, must have a net income of Sh100,000 monthly to be able to access the mortgage facility offered by the bank.

"Lending institutions require a deposit ranging between ten per cent and 20 per cent. This is not always within reach of potential homeowners, particularly first time buyers," says CfC Stanbic Bank’s Head of Personal and Business Banking, Elly Odhong, during the unveiling of the new scheme.

The bottom line then is that mortgage financing is still out of the reach of many Kenyans. This coupled with the reluctance of developers to delve into the lower segment of the market can only mean a lot of Kenyans will have to pay rent for quite some time to come.