What You Need to Know About Mortgage and Home Ownership

Homeownership in Kenya has remained relatively low at 21.3% in urban areas compared to other developed countries such as South Africa at 53.3%. The relatively low rate of homeownership in Kenya is attributed to;

i) high property prices,

(ii) high initial transaction cost e.g. the initial deposit required to access a mortgage,

(iii) lack of credit risk information for those in the informal sector leading to their exclusion,

(iv) high-interest rates for mortgage loans,

(v) lack of real estate finance to fund large scale developments, and,

(vi) low-income levels which have made it hard to service loans.

Focusing of home financing, the Kenya housing market provides home buyers with an array of home financing options among them; bank loans, personal savings, loans from Sacco’s, etc. Currently, the most common method is personal savings. Mortgages are one of the least popular methods of home financing in Kenya with an approximate market share of 6.0% of all sources of home financing according to Kenya Bankers Association (KBA). Mortgages are legal agreements by which financial institutions lend money for the purchase of buildings often residential properties at an interest in exchange of taking the title of the debtor's property: they are provided with the title of a property as collateral and ownership are transferred to the individual taking the loan once payments are completed. The financial institutions usually determine how the payment of the mortgages will be made and failure to commit to payments of the mortgages may lead to foreclosure.

As mentioned earlier, the Kenyan market has recorded relatively low mortgage uptake with approximately 26,504 accounts as at 2018 out of an adult population of more than 24 million. The low uptake of mortgages is currently attributed to relatively high-interest rates averaging at 12.0% as of 2020, the relatively high deposit requirements, unavailability of long tenors making the terms unfavourable for the majority of households amid low-income levels, strict underwriting rules by banks especially when lending to the informal sector, and the relatively high property prices. Additionally, the average mortgage loan size decreased from Kshs 8.52 mn in 2017 to Kshs 8.48 mn in 2018 as banks tightened credit standards to the mortgage market.  

In Kenya, currently, banks are the main providers of mortgage financing, according to the Central Bank of Kenya, Banking Sector Annual Reports, 2018, about 76.1% of lending to the mortgage market was by 6 institutions similar to 2017. Most financial institutions are reluctant to expand their mortgage portfolio attributed to; low supply of long-term capital due to limited access to capital markets funding, asset-liability mismatch by tenor due to the relatively long-term nature of mortgage loans and short-term nature of bank deposits, limited credit risk information especially for those in the informal sector, and, complex legal and regulatory framework as well as collateral requirements making mortgages exceedingly expensive.

In a bid to enhance home ownership and boost the mortgage market in Kenya, the government, through one of its Big Four Development Agenda on affordable housing, prompted the establishment of the Kenya Mortgage Refinance Company (KMRC) in 2018. The facility lends to Primary Mortgage Lenders (PMLs) at an annual interest rate of 5.0%, thus enabling them to write home loans at 7.0% lower than the market average rate of 12.0%. In addition to offering relatively long tenors of up to 25 years, compared to the market average of 12 years.  The facility has two main types of loans, the first one is the affordable housing loans capped at Kshs 4.0 mn in major towns such as Nairobi, Kiambu, Machakos and Kajiado and Kshs 3.0 mn in other towns. The second type of loan is the market housing loan which has a limit of above Kshs 4.0 mn. KMRC, which began operations in September this year targets to grow the mortgage accounts from the current 26,504 to 50,000 mortgage accounts within five years.

When taking up a mortgage, it is important to consider;

1. Budget: it is important to consider the loan size one can afford when looking to secure a mortgage, this helps in ensuring that one takes up a mortgage they can comfortably service given their financial capability thus avoid defaulting;
2. Having a good credit score: when applying for a mortgage, having a good credit score is a huge advantage as it increases the chances of qualifying for the loan as opposed to a borrower with a negative credit score,

• Having savings for down payment: most mortgage loans are not fully financed, a deposit needs to be made once an individual qualifies for a loan. It is important to save up for the down payment to easily access the amount of loans applied for. This will also help in limiting delays and increase confidence of the facility providing the loan,

1. Exploring affordable loan options and having the right lender: having affordable loan options ensures access to loans at favourable interest rates compared to other options provided by primary mortgage lenders. It is also important to have the right lender with an overall good reputation and favourable terms and conditions,
2. Ensuring compliance once the mortgage has been taken: this is important in ensuring that the property that was used as a collateral is not seized in the long run due to instances of loan defaults.

In conclusion, home ownership in Kenya has been relatively low compared to other countries mainly due unavailability of affordable financing options. It is therefore of essence for potential home owners to explore different sources of home financing like mortgages especially with the recent operationalization of KMRC and this will enable them access funds to facilitate their home purchases. In our view, an improved mortgage market is essential for the improvement in home ownership in Kenya.