By FRANCIS AYIEKO

More lenders could soon follow in the footsteps of Housing Finance and start offering either 100 per cent or more than 100 per cent financing to mortgage borrowers.

By offering to lend 105 per cent of the property value through its new product launched early this month, Housing Finance opened a new front in financiers’ battle to get more Kenyans to take home loans. And predictably, its competitors, mainly commercial banks, are going to take up the gauntlet.

Here is why: The 105 per cent mortgages Housing Finance is offering will cover 100 per cent of the property value (meaning the borrower will not be required to raise any deposit); stamp duty (four per cent); and legal fees (usually about one per cent).

What this has done, in essence, is to lower home ownership entry point by removing the main barriers: the deposit (which is usually about ten per cent), and the four per cent stamp duty.

Uptake

With these barriers gone, it is expected that mortgage uptake, which is still very slow, will go up. People who can afford monthly repayments but could not take a mortgage because they were unable to raise a deposit will find a reason to sign up fast.

One reason such people will find such a deal enticing is the rapid increase in property prices. Ordinarily, if you want to buy a Sh7 million house, for instance, you will be required to raise Sh700,000 in deposit and closing costs (stamp duty, valuation fees, legal fees, search fees and insurance charges), which amount to almost ten per cent of the property value.

For the majority of people, raising that kind of money means saving up for some years. The problem is that by the time you are done with raising the deposit and closing costs, the property price will have nearly doubled, meaning you can no longer afford it.

This is why most people will find the 105 per cent financing irresistible. I see many banks joining the fray to take advantage of borrower’s dilemma with raising deposits.

CfC Stanbic Bank, which three years ago became the first lender to offer 100 per cent mortgage financing, recently indicated it was considering to offer 105 per cent or more financing.

But the question is: Does this new so-called innovation make mortgages any cheaper? The answer is: No.

Granted, it lowers home ownership entry barrier for first-time owners, but it also increases the home loan burden for buyers because monthly repayments will be higher than if there had been a deposit.

Instalments

For example, buying a Sh6 million house through a 15.9 per cent mortgage interest from Housing Finance (that is the firm’s current rate) would require a Sh75,128 monthly instalments for 20 years if you had put a ten per cent deposit. With the new 105 per cent financing, you would pay monthly instalments of Sh87,176 under the same terms.

While the idea is noble, it won’t make a lot of difference if the financiers don’t lower the cost of lending, which makes mortgages very expensive.

As long as interest rates remain sky-high (most lenders still charge more than 15 per cent interest rates even after Central Bank maintained, for more than three months now, its base lending rate at 8.5 per cent), offering 100 per cent or more financing might not encourage mortgage uptake in the country.

However, if more financiers join the fray of those offering 100 per cent or more financing, the resulting competition is likely to force them to lower their lending rates, thus spurring mortgage uptake.