Why personal loans are squeezing out mortgages

The lack of a limit on how much customers can borrow as personal loans is one of the factors limiting the growth of the mortgage sector, bankers say.

Additionally, developers’ preference for cash payments also contributes to less mortgages being taken up.

More mortgage accounts would also be in the market if banks would soften their stance on off-plan financing, which NCBA Group director in charge of retail and SME banking Tirus Mwithiga said would only work for experienced developers.

Mr Mwithiga, who was part of a panel of bankers at the 2023 Kenya Mortgage Refinance Company (KMRC) Affordable Housing Conference held in Mombasa in November, said that while developers do not like to be paid through mortgage due to its rather slow and tedious process, lenders also have a dislike for off-plan mortgages.

“Just drive around Nairobi, there are too many stuck projects and in them there is usually a bank with a very upset customer and a developer who for whatever reason did that,” he said.

He said banks have got a little comfortable with the idea of off-plan mortgage through construction financing. He said before, developers would be given money and they would first spend it on other things, neglecting the project.

“A lot of our developers are on their seventh or 10th project. They have completed and sold. They have gotten better," said Mwithiga.

"But for a first-time developer; you know, that retiree from banking who has some bit of money and a plot and they say ‘I can do this’, we remain a little cautious.”

Imarika Sacco general manager for credit Edward Charo acknowledged that his institution faced the same challenge.

“If you were to give a loan, and the project takes 18 months, what happens to that loan before this person moves in?” he posed.

According to Bank Supervision Annual Report 2022 by the Central Bank of Kenya(CBK), there were 27,786 mortgages as at December 2022.

But Mwithiga believes this number should be in the hundreds of thousands if personal loans and particularly those taken through Saccos were to be considered.

The report shows that personal and household loan accounts stood at 13.7 million compared to real estate at 31,146 in terms of sectoral distribution. This is 94.9 per cent of the total loan accounts.

Mwithiga noted many Kenyans have their payslips so squeezed due to personal consumer loans that they have no room for a mortgage facility.

This was echoed by Stella Mutahi, head of mortgages at HFC, who said customers need education on how exactly one can afford a home.

She said a home is arguably the most expensive investment one will ever make in life and clients should be encouraged to save towards that goal.

“The closing cost that come with home ownership ranges between six to 10 per cent; and once you include the deposit, it is a higher amount,” said Ms Mutahi.

“It is important to encourage customers as they are looking at that property they should save even as they bank on that financial institution for equity.”

She said having savings before one purchases the property ensures they are cushioned not only from the initial costs when signing the documents but also during payments.

“In case of macroeconomic shocks like what we have now, you will still have flexible payment. For instance, if you borrowed 70 or 80 per cent, your income will still be able to accommodate the payments."

But besides educating the customer, Mwithiga points out that a cap on how much one can borrow and for what period is necessary for the Kenyan market to leave more room for mortgages.

He cites Singapore, which he said has come up with a policy to gradually reduce the tenure by two years periodically and United Arab Emirates (UAE) which has a limit of four years and a cap as well.

“The effect of that is that peoples’ incomes have room to take mortgage when they need them,” he said.

Such limitations, Mwithiga said, would provide customers with breathing room and it should also extend to digital lenders. 

He said due to the immense success of banks lending personal loans, often used for consumption, most customers who go for mortgage need financial therapy and reorganisation before they are prequalified.

“The fact that people need financial education then reorganisation for us to be able to insert that loan deduction is a real challenge that I think is limiting the uptake of mortgages,” he said.

Stanbic Kenya Business Development and Partnerships manager Emmanuel Mwema said the bank has taken upon itself to offer financial fitness to other firms on what one should do before they step out to shop for a home.

“You find some people come to borrow alone and they are married, and may be they do not qualify for the facility as an individual. But when you educate them that they can combine with their spouse, it becomes a better conversation,” he said.

“Most Kenyans out here are not really informed in terms of what KMRC offering can do to them. More sensitisation needs to be done to achieve affordable housing.”