Gregory Brackenridge

CEO's Profile

Theme |
Topic | Mortgages
MONTH | March 2014

Mortgages

Overview
A mortgage is a loan given out to individuals by a bank or other lending institution designed for the purchase of a home. It is a security backed facility, meaning that when a borrower enters into a mortgage contract, the bank will hold the title deed to the property until the loan has been repaid.

A mortgage is based on the concept that people desire home ownership; however, there are significant costs – especially upfront costs – associated with property development. Most of the mortgages are paid though monthly payments for the loan duration (or loan tenor), usually between 10-30 years. There are different types of mortgages depending on the type of interest paid. These include the fixed-interest mortgage, adjustable-rate mortgage, and interest-only loan.

With a fixed-rate mortgage, the interest rate stays the same over the life of the loan. Some banks may offer part fixed, meaning that you can choose a period (for example one to five years) to pay a fixed interest rate; and thereafter an adjustable rate would take effect.

With adjustable rate mortgages, the interest rate changes upwards or downwards depending on changes with the bank’s base rate. With the interest-only loan, the mortgage borrower pays the interest only as the term states and the pays the principal loan later.

Although the level of mortgages in the market has been reported to being approximately 20,000, Kenya Bankers Association believes that the number of Kenyans who own homes is much higher. This is because individuals have several avenues to finance their home, including from Savings and Credit (SACCOs) Societies, peer-to-peer lending (such as “chamas” and investment groups), as well as other bank loan facilities that are not secured by the title deed of the property.

The KBA’s position is confirmed by a survey titled, 2012 Yearbook: Housing Finance in Africa, which is conducted annually by South Africa-based Centre for Affordable Housing Finance in Africa. The survey found that most Kenyans own homes through construction loans, rather than through mortgages.

That notwithstanding, there are challenges within homeownership that both customers and lenders have to contend with, including inefficiencies that hinder mortgage uptake and transferability, particularly within the Lands Office; as well as numerous associated costs such as legal fees and stamp duty charges.

Moreover, banks hold few mortgage accounts because there is a constraint in terms of long term deposits. This means that banks need assured cash deposits (i.e. fixed deposits locked in for 10 to 15 plus years) in order to lend in the case of mortgages. To raise such funds, banks negotiate ‘wholesale’ deposits with corporations and development finance institutions; as well as raise bonds via the capital markets, all of which come at a higher cost to the bank…a cost which is then passed on to the borrower.