Expected rise in interest rates to hit mortgages

The growth in the mortgage market is expected to slow down in the coming weeks, leading to an increase in interest rates.

What you need to know:

  • The mortgage sector had expected the momentum in growth witnessed last year to be sustained in 2015, but the weakening of the shilling means that interest rates will go up, reminding mortgage holders of the situation in 2011, when interest rates went up.
  • The tightening has been evident in money markets, where the interbank rate has risen by more than five per cent to about 13 per cent since February.
  • “The demand from the public should be enough to show the banks that the market is ripe. But when you have a scenario where the rates are almost twice the base lending rate, these costs aren’t just punitive to the buyers, but also to developers, who at the end of the day have to pass them on to buyers,” Mrs Muraya said.

The growth in the mortgage market is expected to slow down in the coming weeks, leading to an increase in interest rates.

A month ago, the Central Bank of Kenya’s Monetary Policy Committee raised its base lending rate (CBR) from 8.50 per cent to 10 per cent in order to stem the shilling’s depreciation against the dollar.

CBK Deputy Governor Harun Sirima, said: “The emerging aggregate demand pressures and the persistent volatility in the global foreign exchange markets, coupled with the projected recovery in international oil prices, have implications for inflationary expectations. We have, therefore, decided to augment our tightening stance by raising the CBR rate.”

The mortgage sector had expected the momentum in growth witnessed last year to be sustained in 2015, but the weakening of the shilling means that interest rates will go up, reminding mortgage holders of the situation in 2011, when interest rates went up.

Kenya’s average lending rates are now expected to increase after next month’s Monetary Policy Committee meeting, which will see a review of the Kenya Bankers’ Reference Rate (KBRR), which last changed in January to 8.54 per cent. The rates have been stable at 15.4 per cent in the past 12 months, having dropped from 16.91 per cent in July 2014.

“We are definitely going to see a rise in the lending rates because of the increase in the CBR. The KBRR will also rise as this is the tightening stance the Central Bank is taking to stem the shilling’s volatility,” Mr George Bodo, the head of EcoBank Capital said.

INTERBANK RATE

The tightening has been evident in money markets, where the interbank rate has risen by more than five per cent to about 13 per cent since February.

The country had 22,013 mortgage loans in the market as at December 2014, up from 19,879 in December 2013. The average interest rate charged on mortgages was 15.8 per cent at the end of last year. The rates ranged between 8.0 per cent to 21.3 per cent.

Most of Kenya’s mortgages are on variable interest, which Central Bank data place at about 92.5 per cent.

Mr James Kimiri, a financial analyst, says that, given that most of these mortgages are on a variable interest, once the KBRRs are adjusted upwards, the repayment premiums will also shoot up.

“The banks peg their interest rates on the KBRR. The market expects the KBRR rate to go up, so mortgage holders should expect to start paying higher premiums from August, until the next adjustment in January 2016,” Mr Kirimi said.

According to the CBK credit survey, the value of mortgage loan assets outstanding increased from Sh138.1 billion in December 2013 to Sh164.0 billion in December 2014, representing a growth of Sh25.9 billion, or 18.7 per cent.

The high interest rates witnessed in 2012 continued to impact negatively on the mortgage market, with the outstanding value of non-performing mortgages increasing to Sh10.8 billion in December 2014, up from Sh8.5 billion in December 2013.

An increase in mortgage interest rates will compound the constraints in the market.

Mr Charles Mwangi, a property consultant and valuer, said that the high cost of housing/properties, high interest rates, and high incidental costs will be the major impediments to the growth of the bank’s mortgage portfolios.

“The market expected policies such as the adoption of the KBRR to offer competitive pricing and reduce the rates but this has yet to come to fruition,” Mr Mwangi said.

About 68 per cent of lending to the country’s mortgage market is done by four institutions: one medium-sized bank, which controls 27.6 per cent of the market and three large banks, which control 41.1 per cent. The rest of the mortgage market is shared among 32 banks.

The average mortgage loan size increased from Sh6.9 million in 2013 to Sh7.5 million in 2014, but with the increase in mortgage rates, this is bound to come down again.

Suraya Property Managing Director Mrs Sue Muraya says that getting low-cost financing is a big challenge to many developers as the cost of development mortgage is high, despite the base lending rate being a single digit.

MARKET IS RIPE

“The demand from the public should be enough to show the banks that the market is ripe. But when you have a scenario where the rates are almost twice the base lending rate, these costs aren’t just punitive to the buyers, but also to developers, who at the end of the day have to pass them on to buyers,” Mrs Muraya said.

“An increase in mortgage rates will definitely have a negative impact on the sector. We will find it difficult to access development financing, and it will also be a challenge getting buyers because the rates will be unaffordable,” she said.

Data compiled for the Mortgage Report show that only one per cent of urban Kenyans can afford the mortgage repayments for a house worth Sh5.7 million, and a further four per cent for a house that costs Sh3.9million. Central bank figures put the average mortgage loan size at Sh7.5 million in 2014, up from Sh6.9 million in 2013, but with the increase in mortgage rates, this is bound to come down again.

The mortgage report for the first quarter of 2015 showed that commercial banks maintained their unusually high borrowing rates, despite the growing impact on the housing market in the country.

Last year, Deputy President William Ruto called for an enabling environment to allow Kenya to achieve one million mortgages, and for a single-digit interest rate, but this has remained unheeded.

Ms Carole Kariuki, the Managing Director of The Mortgage Company, says that despite some minor adjustments and short-term interest rate discounts by banks, the rates are still unusually high.

“From our survey, we could see that the cheapest mortgage stood at 13.9 per cent while the most expensive mortgages stood at 19 per cent. These double digits are still way out of reach for the majority of Kenyans,” Ms Kariuki said.

Data from CBK shows that Barclays Bank had the cheapest mortgages while Equity was the most expensive among the top five lenders in the country. In 2011, mortgage borrowers were hit with high rates of 26 per cent after the central bank raised its indicative lending rate to 18 per cent.

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