Thursday, March 19, 2009

Intro: Mortgages in Kenya

A mortgage is a loan taken out to buy a house with the house acting as the collateral. This bears repeating. A mortgage is loan just like any other.

For the borrowers
Things to consider are;
  1. Can you afford a mortgage? A mortgage will rarely ever be less than your monthly rental. By itself. Once you add council rates, utility bills, furnishing, maintainance bills (these will be there whether the boma is new or old), you'll see your monthly costs go up by a third of your rent. So you must look at the likely monthly repayments. Your mortgage repayments will depend on...
  2. Price of property: Prices have rocketed in Kenya though the upmarket areas are now seeing a much needed cooling off. I think the key driver was the cash-only buyers primarily remittances and these are already falling off. However, the lower end of the market has sufficient demand to see it continue growing but I doubt we'll ever see the frentic pace in the upmarket areas. Websites that will get you a feel for prices are many but a few are villacare;; hassconsult; nyumbanet and uzanunua. Many think that there is a bubble in the market and this may well restrict your resell price should there be a marked corection.
  3. Your deposit: The higher the deposit you put down, the lower the loan you need to borrow. And of course the lower the amount you want to borrow, the more interest rate options you get. The key criteria is always, are you better off reducing your monthly mortgage repayments compared to earning a return in some other form of investment. Put another way, can you invest the deposit in another venture that gives you more than say the 15% interest rate that you will save by oputting the deposit down? However, its rare in Kenya to get 100% mortgages so some deposit will be required.
  4. Interest rates: There are two things you need to know about interest rates generally, the current rate and the future expectations of where interest rates will go. There are two types of interest rate deals that are currently offered in Kenya. Current interest rates are set depending on amount you want to borrow and duration (term) you want to borrow for. Variable interest which basically means that it moves as general interest rates. So future expectations become of added importance. And initially fixed interest rates. I have put together a little table that I'll update from time to time.
  5. Monthly repayments: From the above, you should now have the bits that will help you decide what type of house you'll buy based on its monthly/annual cost. You just need to plug the numbers into this Excel equation... = PMT(interest rate/12,term*12,property price less your deposit). Alternatively, go here and input the same numbers to get your monthly payment.
  6. Location: This is a feature unique to Kenya where some banks only offer mortgages in specified towns. Reason is obvious.
For the lenders:
Important factors. With mortgages, its as important for the borrower to know what the bank will look for before lending.
  1. Income expenditure gap: Most lenders want to know that should they have to or decide to jack up interest rates, there is enough of a gap in your income-expnditure to allow for this. So for example CBA won't allow repauyments that sccount for more than 50% of your monnthly income.
  2. Loan to value ratio: aka LTV. Should be no greater than 80% or anticipated price correction at time of appplication.
  3. Income mulitples: Simply put this is the ratio of your annual gross salary to mortgage amount required. Prudence dictates that this shouldn't be more than 4 times.
  4. Screening reqquirements: Many banks tend to have more onerous requirements when they want to reduce lending and vice versa when they want to increase it.
  5. Other mortgage set up costs: These are noticeably higher in Kenya and include stamp duty, legal, processing fees et al.
Final point.
  • Take a mortgage to suit your stage in life. If you are young or have a young family, you'll surely be making a move to another house at sometime in your life. Therefore, consider a mortgage as you'd any other investment. Without getting emotional.
  • Late edit: If you are in the diaspora, avoid if you can, taking a mortgage in Kenya and if you already have one, exchange it. The difference in interest rates is just too big especially now. Instead, borrow from a local bank at a lower interest rate and buy the property or pay off your Kenyan loan. Kama ni makaratasi, find somebody who can do this in exchange for your title deed and an agreement.
BTW: the word mortgage is of French origin and literally means dead pledge.


bankelele said...

important to consider for real estate investors is the 'unbanked' portion of real estate in kenya. i.e construction and development without any financial intermediaries. these can include people buying houses without mortgages (refugees, diaspora investors - tend to be upper scale) or building without development loans (policemen, hot money - tend to be lower scale without building permits,approvals, shoddy construction). The Sunday nation and Voice of America have reports this week that try and address these factors as gaps in morgtage finance analysis

Ssembonge said...

Maina, the lower end of the market is for people who buy and build with sacco/bank loans. They are at the mercy of the economy unlike the upper end that is fueled by corruption. The other thing to keep in mind is that first time home buyers are the foundation of the housing market. They are the equivalent of liquidity in the NSE. Once they realize we are in a slow down they will sit by the sidelines and then the whole thing starts crumbling down.

Excellent summary.

FoodMerchant said...

Timely post.You should do a followup for the Diaspora folk on which banks are good for them.I know, we are needy bastards but I bet your info is better than what my bro provides sinces he adds a tax on everything=)

kenyanreality said...


Thanks for doing this post on mortgages. It is helpful for me to assess (though in hindsight) whether the mortgage I took was a good idea or not.
I have used your general formula of gross annual salary*4 = amount to borrow - it is a good guide but even then @ 15% repayment is a struggle.

@bankelele - do banks still offer competitive rates (5%)for employees??

MainaT said...

Banks-I left out a lot of stuff just so I could keep it short. The cash-only sector I mentioned in passing because I think its been the main driver of real estate growth so far. The hot money is ofcourse the prevalent one in places like Eastleigh.
The main problem in Kenya is the lack of data on all the various trends. For example nobody has even tried to come up with a price tracker to aid analysis about market trends.

MainaT said...

Ssem-ditto. When I head home, I'll do some analysis of what exactly is going on in the market rather than anecdotal analysis.
Food Merchant-banks did a very useful post on this some months back.
KR-The income multiple is something that the banks should be worrtying about not you. For you, it should just be a guide as to what they'll be looking at.
The thing you needs worry about are under borrower basics. With that interest rate, my humble advise would be please try and look to borrow from wherever you, payoff the remaining loan and be paying your local bank at a much lower interest rate.

Concept Advisory Services Ltd said...

A site worth checking for Kenyans in the diaspora on the same topic.

And Maina let me have the forwarding address for the Memo and Articles already done..

Ssembonge said...
This comment has been removed by the author.
Concept Advisory Services Ltd said...

@Ssembonge,Kindly get in touch using admin at conceptadvisoryserices dot co dot ke.. We are currently experiencing a problem uploading comments on the blog. I would love to hear the 'misleading' bit

Ssembonge said...

I have deleted my comment. It seems that concept blogger may responsible for swallowing my comments on their blog.

MainaT said...

Ssem :-) good to see you are still around

kavingi said...
This comment has been removed by the author.
kavingi said...

I would want to know about the aspect of mortgage like the one followed by NHC where they have Tenant purchase agreement. Whats Ups and Downs of that. Is it better than when someone buys a house through mortgage?

aldrin james said...

I was planning to visit to Kenya and try to found some mortgage company. This article really helps a lot. Now I know what are waiting for me in that place.

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Tim said...

great article this. though i must admit the number of kenyans affording mortgages are in the minority.. the interest rates are simply out of this world..