For years, owning a home through a mortgage in Kenya has been seen as an unsuitable investment, with bankers tying this to the desire for a ‘dream home’ against low uptake in the country.
Most homebuyers aspire to have a standalone housing unit with a garden area or a luxury apartment, which means one would end up spending more or limiting their income.
Most of these developments are prime priced at Sh15 million, which most cannot afford.
However, the Head of Mortgage Retail and Business Banking at Absa Bank Kenya, John Kaburu, says the idea of a dream home can be changed to an affordable unit that can later be an investment when rented to diversify one revenue stream and ensure cash flows at retirement.
“Among the things we are asking is that your first home should not necessarily be your dream home. It should be what you can afford. If you check your income, chances are there is a house you can afford. It will give you a base as an asset portfolio in real estate before you get to your dream home,” says Mr Kaburu.
The banker says owning a dream home can be a costly affair, denting one’s savings and stretching income, hence one should consider what would be supported by their income.
This would likely expand the uptake of mortgages for people between the upper 20s and lower 30s from the current late 30s.
“You just need to balance infrastructure, affordability, ease of commuting and amenities around,” he adds.
The value of mortgage loans outstanding in Kenya was Sh245.1 billion as of December 2021, representing Sh12.4 billion or 5.3 percent increase from Sh232.7 billion in December 2020 due to higher values of mortgages granted over the year.
However, the number of mortgage loans was 26,723 in the market, down from 26,971 in December 2020, representing 248 mortgages or 0.9 percent drop due to a higher repayment as compared to the number of new mortgage loans granted in the year.
This number is seen to be low and attributed to high property prices, high-interest rates and availability of a certain range of houses or mortgages.
There is also a high preference for unsecured loans to mortgage for construction or home purchases, evidenced by a boom in the real estate sector, which Mr Kaburu says points to low uptake of mortgages.
“Most people could be homeowners, but not through the mortgage route, but unsecured products. You go to the sacco or bank, you take a loan, you buy a plot, you repay it over time, and you go back to the bank for a top-up, you start building the slab, push the loan, again for some few years,” he says.
Absa Bank, which is among the 32 institutions offering mortgages, has been conducting training to raise its home loans uptake through customer events. The lender is working with employers to present housing options and hold financial literacy sessions. It is also hosting discussions on social media platforms on more accessible and effective home financing solutions for customers.
“We are doing education around what is the best route. You find someone is taking many unsecured loans and stretching their monthly income to try and build over a very long time. Yet they could take a mortgage, and the monthly repayment is way lower than all the combined loans that they are servicing,” Mr Kaburu says.
This is amid fears of homebuyers on the uncertainties of the business and employment environment, so they avoid mortgages from banks.
“It’s not that people don’t borrow to own homes. They borrow unsecured loans to own homes. Awareness and education can change that. For instance, managing with Sh40,000 to own a home within five and half years as opposed to Sh40,000 with unsecured loans that you borrow over seven or nine years before you get to your home.”
“When meeting a potential customer, I encourage them to go the mortgage route to be able to manage their cash flows. Because you run a risk where you may not be able to get the house on time, and that is why you see some stalled projects because it was not planned well.”
The Central Bank of Kenya (CBK) data also shows the average mortgage loan size had increased from Sh8.6 million in 2020 to Sh9.2 million in 2021, mainly due to higher values of mortgage loans advanced in the year.
The average interest rate charged on mortgages in 2021, was 11.3 percent ranging from 7.1 percent to 15.0 percent, against Absa’s non-affordable housing lowest interest rate at 13.4 percent.
This was compared to an average of 10.9 percent with a range of 7 .0 percent to 15.0 percent in 2020.
The bank runs a wide range of mortgage products to offer competitive rates on pricing, including the common one for building-construction loans.
The solution is offered to potential homeowners with land set aside for building and those without. For those with land, Absa Bank finances 100 percent of the project cost for up to 20 years, while for those without, the client contributes only 20 percent of the overall project cost for buying and building, hence the bank finances 80 percent.
“We are talking to easiness, and you will feel comfortable servicing that loan over 20 years. There is still freedom to repay in advance without any penalty. And that reduces your interest and tenor of the loan,” Mr Kaburu says.
“That’s why you find most of them, the mortgage loans on average, will go for about eight years because we don’t penalise for early repayment.”
Absa has also been offering straight purchases for a complete home, including affordable housing, targeting middle-income customers and those earning below Sh150,000, with the maximum loan amount being Sh8 million.
For this type of loan, the bank finances between 90 and 100 percent of the purchase price, which can be used for construction.
It also provides loans for the conventional market going beyond Sh8 million to up to Sh10 million full financing with a repayment period of up to 25 years.
The affordable housing loan is provided through a private-public offering with Kenya Mortgage Refinance Company (KMRC) that issues money to banks and saccos for onward lending for home ownership under a fixed interest rate of sub 10 percent.
“A house of around Sh4 million at 9.5 percent on the upcoming affordable two-bedrooms, the monthly payment will be around Sh40,000. Yet in some locations, the rent collections could match that or be higher.”
Absa Bank also offers equity releases where one uses their current property to access additional funds, takeovers from other banks or financial institutions, mortgages for Islamic customers with Shariah compliance, and mortgages in currencies like US dollars, Euro and British pounds.
“There is no limit. The principle is your ability to pay as long as you can demonstrate that you can comfortably pay without interfering with your overall plan. We don’t want it to be a burden; we will support you.”
“We walk with customers in their homeownership journey in terms of advice and analysis. The mortgage being a huge investment, needs huge cash flows, and hence we want to fit it in with your financial plan,” Mr Kaburu adds.