Covid-19 lessons on mortgages: What works and what doesn’t

Title Deeds show ownership in addition to rights, obligations or mortgages [Courtesy]

In October 2017, Julia* was the happiest lady in and around Athi River. As a single mother, it was a “big step” to owning a home – albeit through a mortgage.

“Finally, I was on the path to owning a home,” she says. “If I ever lost everything, we would still have a roof over our heads.”

The irony is that Julia lost everything. She had taken a Sh8.5 million mortgage facility to be repaid over 15 years.

In March 2020, when Kenya confirmed its first positive Covid-19 test, she was a manager in the hotel industry. “We were about to be hit hard by the pandemic. Cross-border travel was halted. Tourism – the largest source of our clientele – crumbled,” she says.

Come June, Julia and her colleagues acquiesced to salary cuts. “The company was not making money. It was inevitable,” she says. A few weeks after that first positive case, the Central Bank of Kenya (CBK) allowed lenders to offer relief to distressed borrowers. Julia’s bank allowed her to restructure the mortgage, first for three months, then later for an extra six months.

“The short-term amnesty gave me hope. But then what I had dreaded most happened: my position was declared redundant. I lost my job in October.”

The one-year CBK moratorium ended and found Julia jobless. Her first reaction was to go to the bank and seek more restructuring.

 “I did not want to lose the house. I had not just invested money in it; I had redesigned the interior and changed paintwork. I had invested the whole of my being in that house,” she says.

Hate mortgages

The bank told Julia that based on “the numbers” they could not offer her much in terms of relief. This meant that the inevitable was bound to happen.

In April this year, she received an auction notice and by June, she had lost the house.

Indeed, Philips International Auctioneers Chief Executive Muiruri Njoroge confirmed to Real Estate that there is a significant uptick in mortgage-related auctions compared to the previous years. “I wish I had just rented a cheap house. This whole experience has made me hate mortgages,” says Julia.

The 2012/2013 housing survey showed that only 18.5 per cent of homes in urban areas are owned by those who live in them.

Unless you have bundles of money hidden under a mattress, homeownership, especially in our cities and major towns, is only possible through a mortgage.

“A mortgage is a long-term loan that allows one to either buy or build a home,” says Chris Chege, the Head of Mortgage Banking at Co-operative Bank of Kenya.

As Julia is cursing on mortgages, one of Chege’s clients, Joan Atieno*, is thankful for the existence of the mortgages.

Atieno took a Sh4.5 million mortgage in 2013. The mortgage was for a bungalow in one of the satellite towns around Nairobi.

As per the agreement she signed with the bank, she would repay the loan in five years, at the rate of Sh110,000 per month.

At maturity, the mortgage had cost her Sh6.6 million - about Sh2.1 million more than the principal amount she got from the bank. “Isn’t that a lot of (extra) money to be giving to the bank?” we posed the question.

“Not at all,” she responded with a stern voice. “I now own a home for my family. The house has appreciated – if I were to sell it, I would ask for a lot more than Sh6.6 million.”

That kind of money

She observed: “Most importantly, I would never have been able to raise the Sh4.5 million. How many Kenyans have that kind of money – all at once?

“While the bank made some money from me, the mortgage enabled me to own a home.

“Had I started saving money to buy the house, it would have taken me years to raise the Sh4.5 million. By that time, the house would have already been sold. And its price would be higher than the Sh4.5 million value as of 2012,” she says.

Atieno cleared her mortgage successfully. She then took another mortgage – with the same bank – but this time for a commercial property. She has “zero” regrets about taking a mortgage to own a home.

A mortgage is working for some and not quite for others. This has been even more apparent this year as data by CBK shows that defaults on mortgages jumped 48 per cent to Sh70.5 billion in the year to March 2021.

“The real estate sector registered the highest increase in non-performing loans by 14.9 per cent (Sh9.1 billion) as a result of disruptions by Covid-19 pandemic,” CBK noted in the banking sector review of quarter one of the year.

Right person

Head of Mortgage Finance at Co-operative Bank Chris Chege says the reason mortgages don’t work for some is suitability. “People take mortgages not suited for their financial profile,” he says. A payslip reading a gross salary of Sh1 million would likely earn one mortgage financing. But according to Chege, this client may not be the right person for the mortgage.

“If you earn a million shillings but your lifestyle consumes as much as 90 per cent of that money, you wouldn’t be an ideal candidate for a certain level of mortgage,” he says.

Consequently, someone whose monthly income is Sh100,000, cannot just take any mortgage. “There are calculations, as well as forecasting, that goes into determining the kind of mortgage that would be suited for them,” Chege says. Taking a mortgage, he adds, requires a certain level of discipline in financial management. Covid-19, health experts say, is likely to hover around for a few more years. This means that the full extent of its effect on mortgages is yet to unravel.

Chege’s advice is that the mortgage client currently experiencing reduced cash flow to take the initiative and approach their bank for a candid conversation. “Covid-19 has taught everyone – corporate institutions included – valuable lessons. “For us, we have learnt to look at our transactions with our clients as more of a relationship. “Mortgage clients have come to us and we have been able to restructure their facilities as well as offer advice that is beneficial to all parties,” he says.

“Come and explain your situation. Answer the questions your banker asks honestly. They would then be able to tell you available solutions for your situation.” “For instance, they could offer to restructure your mortgage. They could also offer to exchange properties – so that you settle for a cheaper property and relinquish the expensive one,” he says.

And now, struggling mortgagers on a pension scheme have the option of channelling 40 per cent of their benefits to finance their facilities. “This too is another option,” he says.

The Retirement Benefits (Mortgage Loans) Act now allows members of registered retirement schemes to utilise up to 40 per cent of the accumulated contributions to pay for a residential property.

At the end of the day, Chege says, none of these options would be available if the client does not approach their banker to explain their situation and discuss available options.

How to make a mortgage work for you

It is Chris Chege’s certain belief that everyone involved in an economically profitable activity should afford a mortgage facility.

“The issue is what size of mortgage can you afford?” he says.

The following are key steps you could take to ensure you successfully service a mortgage and that you never regret.

1. The ‘How much?’ question: Take a mortgage that you would repay comfortably. Muiruri Njoroge, CEO of Philips International Auctioneers, advises prospective mortgage clients to seek advice from a financial consultant.

He says the majority of people don’t do due diligence. They should have an analytical look into their finances. “Many are victims of peer pressure,” he notes.

The idea, Chege says, is to find something that is tailored to your profile. “For instance, if you are on your first job after college, you don’t need a four-bedroom house.”

At the same time, the standard unofficial rule, he says, is that housing, as a component of expenditure, should be within 30 per cent of your net pay.

2. Accelerate payment: According to Chege, while one might be allowed to pay a mortgage over a long period, one should strive to clear the debt quickly. “Mortgage interest is charged on reducing balance,” he says. “The faster you pay the better for you and the less costly it is.”

If your monthly repayment, let’s say, is Sh68,000, Chege’s advice is that you aim to pay even more: “If you can remit Sh150,000, the better for you.”

3. Max-up use of property: In Chege’s over two decades of experience in the industry, people take mortgages for a variety of reasons. “It could be because you want to secure a home for your family, or, you want to put money in an appreciating asset,” he says.

Whatever your aim, he says, be flexible. “Avoid getting emotionally attached to the property. Be open and willing to use the property to your advantage,” he says.

“For instance, if it is a property sited on a piece of land within Nairobi CBD, wouldn’t you rather convert it into a commercial complex?”

4. Be open to various exit strategies: Chege says: “When you sign up for a mortgage, always have an exit strategy. Have an end-game in mind.”

According to Chege, when one loses income, and push comes to shove, they should be willing to salvage the mortgage by being open to other ideas. “Again, go to your banker and talk it out. At Co-operative Bank, we have done exchanges for distressed mortgage clients.

“If you have been paying the mortgage for a Sh20 million house, and you lose income halfway through repayment, we could allow you to swap for a Sh10 million one,” he says.