State firm caps cheap mortgage at Sh4 million

The State-backed mortgage firm will cap cheap home loans at Sh4 million, kick starting operations after the Central Bank of Kenya (CBK) granted it the permit to start lending at an annual subsidised interest of seven percent or nearly half the prevailing market rates.

Home buyers in Nairobi metropolitan area — which extends to neighbouring Kiambu, Machakos and Kajiado counties — will access a maximum of Sh4 million for mortgages, while the funding for the rest of the country has been capped at Sh3 million.

This means individuals who qualify for the subsidised loans or those earning less than Sh150,000, will have to top up their loans with commercial credit should they seek a home above the Sh4 million.

The CBK on Friday licensed the country’s first mortgage refinance firm, paving the way for commercial banks to access long-term finance for home loans.

The lower home loan rates are the product of the newly established Kenya Mortgage Refinance Company (KMRC), a Treasury-backed lender, which offers banks and saccos cash for onward lending to households.

KMRC will lend to banks and financial co-operatives at an annual interest of five percent, enabling them to write home loans at seven percent—lower than average market rate of 11.94 percent or 42 percent cheaper.

The chief executive of KMRC, Johnstone Oltetia, said the refinancing firm expects to start lending immediately, arguing that the CBK permit was the remaining hurdle.

“The whole programme is aligned to the affordable housing framework. So, we are trying to help people who are at lower level to get financing for housing,” Mr Oltetia said in an interview with the Business Daily.

Buyers seeking loans for houses valued above the set limits will have to negotiate with participating lenders for additional funding at market rates, Mr Oltetia added.

The government owns a 25 percent stake in KMRC, with the rest of the shares held by banks, saccos and microfinance institutions. Its board of directors has been in place since July last year.

Shelter Afrique and the International Finance Corporation (IFC), the World Bank’s private financing arm, became the newest shareholders of KMRC. Shelter Afrique paid Sh200 million for its shares.

KMRC has so far mobilised nearly Sh40 billion, including Sh2.2 billion in equity capital, Sh25 billion committed by the World Bank and Sh10 billion from African Development Bank (AfDB).

The refinancing firm has opened a window for those earning Sh150, 000 a month to access home loans, but at fixed market rate.

Mr Oltetia said the World Bank directed that 20 percent of its funds or Sh5 billion be lent to high-income earners at prevailing market rates.

He added that AfDB has offered a “small share” of its funds to top earners, but capped at Sh8 million.

This means the role of KMRC will be limited to mobilising more cash for mortgages and cushioning the primary lenders from losses linked to defaults.

Mortgage firms have shied away from writing housing loans, mainly due to a lack of long-term deposits in the industry to match them.

KMRC will now feed the banks with long-term funding, reducing the lenders’ reliance on short-term loans.

“We anticipate that KMRC will refinance about 30,000 mortgages in four years. That means we would have even doubled the number of mortgages in the country,” Mr Oltetia said.

Commercial banks in Kenya had only 26,504 mortgage accounts in their books worth Sh224.8 billion as at the end of 2018, according to the CBK data.

The mortgage penetration rate, at only 2.7 percent of gross domestic product (GDP), compares poorly to South Africa’s mortgage industry that makes up 31 percent of GDP.

Banks have gone slow on providing home loans due to a spike in defaults.

Default on mortgages jumped 41 percent to Sh38 billion in 2018, pointing to widespread distress in the real estate sector as the Kenyan economy slows down and property auctions pick up.

Latest CBK data shows that mortgages recorded the highest growth in non-performing loans (NPLs) last year from Sh27.2 billion in 2017, reflecting the struggle by investors to find buyers for their houses amid dwindling returns.

The CBK is yet to release the 2019 data.

Unpaid mortgages increased by Sh11.2 billion or 41.1 percent, a rise that outpaced other segments like manufacturing (19 percent), trade (four percent) and personal loans (six percent) in growth of default on loans, the CBK said.

The mounting defaults in the property market are a reflection of the struggles that mortgage holders are undergoing in an economy that has witnessed a string of job losses in recent months across nearly all sectors as companies intensify austerity measures to protect their profits.