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Mortgage market energized by new rates and policies PDF Print option in slimbox / lytebox? (info) E-mail

• Standard Chartered moves to promotional 10.9 per cent mortgage rate, marking a step change in mortgage margins

• 5 of the 15 top mainstream mortgage lenders cut rates in the second quarter, Standard Chartered by 3%, KCB by 1.6%, and I&M, Chase and Consolidated by 1%

• The average mortgage rate falls to 16.3% in second quarter, from 17% three months previous

• The introduction by CBK of the Kenya Bankers Reference Rate at 9.13% is set to pull mortgage rates downwards

• The Kenya Bankers Association introduction of APR (annualized percentage rate) is set to reveal the full costs of borrowing

• Together these moves are set to energize the country's mortgage market

• Next steps should be standardizing mortgage paperwork and building products designed for the self employed

 

 

Total returns on mortgaged house purchases

 

A comparison of the costs of a variable mortgage, versus the gains in house price appreciation and rental income in each year.

 

SNAP SHOTS


Average lending rates over the last ten years.

 

 

 

 

 

 

 

 

 

 

SNAP SHOTS

Total returns from a mortgage buy (house price capital appreciation rental income per year) less  the annual cost of a mortgage will illustrate whether or not the mortgage is a profit or loss per year. When the black line rises above the red line, you are making a profit even with the cost of the mortgage.

 

 

 

 

 

 

 

 

Moving In The Right Direction For The Mortgage Sector

Caroline Kariuki, Managing Director of The Mortgage Company provides insights into the mortgage market.

The recent introduction of the Kenya Banks' Reference Rate at 9.13% on 8th July is the first step towards developing a more vibrant mortgage market in Kenya. The KBRR would be the equivalent of the LIBOR (London Interbank Offer Rate) against which all international currencies are priced. The standardization of the offer rate means that the Central Bank rate that previously was ignored by banks in setting up their base rate will now be a serious reference rate for all financiers.

Standard Chartered Bank in launching their mortgage offer of 10.9% p.a. was the first bank to conform to the new rate guidelines quoting the rate as KBRR +1.77%. What this means is that the mortgage rate will be fixed for 6 months until the Central Bank of Kenya reviews the KBRR.

The second great step was in the introduction of the APR (Annual Percentage Rate) or total cost of credit for all lenders.

The APR that was introduced by The Kenya Bankers Association on 1st July 2014 includes interest rates, bank charges and fees including legal, insurance, valuation and government levies. This will promote more transparency in pricing of all loans and full disclosure of the other costs in availing the loans. This will go a long way in enabling borrowers to have a full view of the commitments they are making in taking the loan without any hidden costs.

Positive reporting on the Credit Reference Bureau has also opened up visibility for lenders of the true position of borrowers in terms of credit. The initial reaction is to see individuals as highly exposed, but with time, this will be viewed positively, as being able to handle debt is critical in the financial discipline of long-term commitments.

The highly publicized reform agenda at the Ministry of Lands, Housing & Urban Development is also another positive step towards creating the framework for an enabling mortgage sector. With the digitization of the land records, the titling process will become much more efficient and reliable, therefore opening up the industry for the secondary mortgage market.

With these three great initiatives in place, we need to do two things: the first is the standardization of documentation and the other is the need to critically analyze the unique composition of the market's dynamics to enable us open up the industry to universal acceptance.

In more developed markets, mortgage documentation is standardized so that mortgages are similar despite the originating bank. This means that the application forms and the security documentation are all standardized, and the legal documentation and valuation parameters make mortgages comparable, despite the different service providers. This will be a pre-requisite to having mortgages sold to the secondary market. Given the youthful nature of our market, this is an opportune time to undertake this process.

Kenya is, however, a unique market with different characteristics from the rest of the developed market. We have attempted below to outline some of the unique features that define our market and that will need to be taken into account to facilitate growth and uptake.

1. Kenya is defined by the predominantly self-employed sector, which, to date, has little or no access to mortgages.

The ability to adequately analyze and price risk for this sector will be very important in growing the housing market in future. It is very interesting how the micro finance sector, led by Equity Bank, has found ways in analyzing business related risk and yet these institutions have not been able to finance the home market using a similar model. The unique features of the sector do not lend themselves to the traditional mortgages designed for long term regular income and yet, if Micro lenders can meet business obligations, we surely can overcome the barrier of designing products that will facilitate home ownership in this segment. Perhaps Government intervention through the introduction of a Guarantee scheme will reduce the perceived risk of lenders, or the combination of a savings and loan product, where the borrowers save up for some time to create a buffer for any defaults.

2. Funding the mortgage sector will need to be done differently as bank deposits are neither sufficient nor well matched in risk and tenor. The introduction of the higher premiums for pension funds may be the opening that the market requires to find well-matched liquidity for the mortgage sector. If this is well structured, we need not put our pensions at risk, but facilitate the much needed funding to sustain and grow our home ownership levels.

3. Our economy is agriculture based and while in most rural settings the population owns their homes, the issue here is the quality of housing that is there. Incremental housing models that tie in income from agricultural cycles and home improvement finance would be a definite opening for the sector where a self build model would be better suited. With Kenya being the 2nd most developed financial market after South Africa in terms of financial access, it would be easy to translate the regular inflows from milk, tomatoes, sugarcane, tea and coffee into regular flows for housing finance.

In conclusion, Kenya is moving towards a great space with mortgage lenders having more information to make better credit decisions and buyers having better protection from lenders with a full view of the cost of credit. Exciting times are coming with the banks taking a more competitive stance and the margins beginning to narrow. Once the CBK takes on a more aggressive KBRR, we should see the mortgage sector heading in the right direction of lower cost of debt and the mortgage uptake becoming a norm rather than an exception.

 

 

 

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Did you know

Buy-to-let gains recovering as

mortgage prices fall

  • Mortgage rates have dropped sharply in the last two months
  • The best mainstream mortgage offer is now Barclays at 15.5 per cent
  • The highest mainstream mortgage offers are now from National Bank and Chase Bank at 22 per cent
  • The comprehensive cuts have seen the average mortgage rate move to 19 per cent, from 22.5 per cent in the second
    quarter
  • Foreign currency mortgages are being made available at much lower rates still, from 9 to 10.25 per cent, but carry
    heavy exchange rate risk
  • The third quarter brought a sharp recovery in the combined returns from rents and house price rises for buy-to-lets, to
    13.12 per cent in September, up from 6.81 per cent in June 2012

Mortgage rates declined, in some cases by as much as 6 percentile points, in the third quarter of 2012, reported The
Mortgage Company in its quarterly mortgage report.
At the same time, the returns from buy-to-lets jumped sharply, significantly narrowing the gap between returns and
borrowing costs.
The biggest rate cuts since June came from Barclays, which cut its mortgage rate by 6.4 percentile points, to offer the
currently lowest mortgage rate in the mainstream market, at 15.5 per cent.
Other notable cuts came from HFCK, which cut its rates by 5 percentile points to 18 per cent, and Equity Bank, which cut
its rate by 3 points to 21 per cent.
However, many mainstream banks were slow to follow, finally announcing cuts this week. This latest realignment has
moved the average mortgage rate to 19 per cent, and sees National Bank and Chase Bank topping the league for the
country's most expensive mainstream mortgages, at an annual interest rate of 22 per cent.
“Some mortgage takers are really suffering through holding mortgages with some of the country's most expensive
suppliers - in some cases now paying several hundred thousand shillings in extra interest payments a year,” said Ms Carol
Kariuki, the MD of The Mortgage Company (TMC).
“This, alone, brings home the need for full information flows on the different mortgage rates available in the market, so
that consumers can choose genuinely competitive mortgage offers,” she said.
TMC also published its first league table on the foreign currency mortgage rates available in Kenya from I&M Bank, CFC
Stanbic, CBA, Equity Bank and Bank of Africa.
“With interest rates on these mortgages running at between 9 and 10.25 per cent, these mortgages are currently far
cheaper than shilling-denominated mortgages, but mortgage takers need to take great care with foreign currency
mortgages, where repayments are in dollars, pounds or Euros. When the exchange rate moves against them, it can leave
them carrying huge extra burdens in buying the foreign currency for their mortgage repayments,” said Ms Kariuki.
For mortgage financed landlords, who for the last decade, were earning more from rent and house price appreciation
than they were paying in mortgage interest, the last year brought a marked dip into negative returns.
However, the gap between gains on buy-to-let houses and pay-outs on mortgage interest narrowed sharply in the third
quarter, with buy-to-let returns climbing to reach 13.81 per cent by September, from 6.81 per cent in June.

Total returns on mortgaged house purchases

A comparison of the costs of a variable mortgage, versus the gains in house price appreciation and rental
income in each year.

How recent rate cuts are leading to

big savings on repayments

Scenario: A Kshs. 10m mortgage (20% deposit) over 20 years based on the
best rate available at that time.

SNAP SHOTS

A 3.5% rate cut from April 2012 to October 2012 led to a 16.5% reduction in monthly repayments.
A 2.1% rate cut from April 2012 to July 2012 led to a 11% reduction in monthly repayments.
A 1.4% rate cut from July 2012 to October 2012 led to a 6% reduction in monthly repayments.

Preferential Rate Mortgages

Did you know that high net worth individuals and preferential clients can sometimes get better rates?

Mortgages available to the diaspora

At a glance, banks best rates for foreign currency mortgages available to those earning an income in
US Dollars, GB Pounds or Euros including but not limited to the diaspora.

How Kenyan property yielded better returns for the diaspora

over the last ten years

Scenario: Buying a Kshs. 10m home in Kenya with a 20% deposit and a 9%* interest rate over a 10 year period yielded
a return of Kshs. 18.9m while buying a home in the US with a 20% deposit and a 3%* interest rate over a 10 year period yielded
a return of Kshs. 3.7m. This is because property in Kenya over the last ten years has appreciated on average 331%
versus 50% for US properties. *Return is calculated by subtracting total cost of home from value of property at period end

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