According to the Kenya Bankers Association (KBA), mortgages are the least-popular methods of home financing nationally with a market share of six per cent of all home financing sources. Why is this so?
To explain this, a mortgage is a legal binding agreement in which a financial institution lends money for the purchase of property at an interest, in exchange of holding the title deed until payment is fully settled.
The lending financial institutions determine how the payment of the mortgages will be made and failure to commit to payments of the mortgages may lead to foreclosure — being stopped from paying and the property auctioned.
Since independence, a paltry number of Kenyans have managed to purchase houses successfully using mortgages, as the mortgage portfolio stood at 26,508 as at 2018.
This partly explains why home ownership in urban areas stands at 21.3 per cent compared to South Africa at 53.3 per cent. Majority of Kenyans have given mortgages a wide berth following the high interest rates averaging 12 per cent, high deposit requirements and high property prices.
There are also low-income levels, strict underwriting by banks when lending to the informal sector and unavailability of long tenors making the mortgage terms unfavourable to many. There are also high initial transaction costs — initial costs to access mortgage, high interest rates and a shortage of real estate finance to fund large scale developments to meet demand.
Financial pundits also concur that lenders are reluctant to expand their mortgage portfolio over low supply of long-term capital due to limited access to capital markets funding. Therefore, with the above information, it is important to consider several factors before taking the leap of faith and buying a house via the mortgage route.
For instance, it is important to know your income to secure a mortgage that you can comfortably service to avoid repercussions of defaulting. It is also better to consider your credit score before applying for a mortgage — being listed on the Credit Reference Bureau (CRB) should be a no-go zone.
Mortgages are not fully financed a deposit should be made once an individual qualifies for the loan — it is therefore important to save for the same as financing institutions may require a down payment of between 10 and 20 per cent of the property price.
It is also important to shop around for affordable mortgages offered by different financial institutions before settling for the best good reputation and favourable terms and conditions.
The government has also tried to make home ownership ‘friendlier’ by establishing the Kenya Mortgage Refinance Company (KMRC) two years ago. The facility lends to Primary Mortgage Lenders (PMLs) at an annual interest rate of five percent, enabling them to write home loans at seven percent lower than the market average rate of 12 per cent.
- Harold Ayodo is an Advocate of the High Court of Kenya
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