‘Move to raise interest rates will hit mortgage sector’

Monday May 16 2011

According to a Central Bank of Kenya mortgage finance analysis released in November 2010, Kenya’s mortgage rate to GDP ratios remained low — at 2.48 per cent. Photo/FILE

According to a Central Bank of Kenya mortgage finance analysis released in November 2010, Kenya’s mortgage rate to GDP ratios remained low — at 2.48 per cent. Photo/FILE 


Industry players are cautioning against price wars in the mortgage market as commercial banks across East Africa race to meet the rising demand for homes and commercial buildings.

They fear that the move by central banks across the region to raise interest rates — expected soon — in a bid to protect their economies from inflationary pressures and weakening currencies, would mean home owners pay more on their mortgages.

Among other incentives, banks have been reducing interest rates on mortgages or offering full property financing in order to woo more customers.

But Frank Ireri, managing director of Housing Finance, said rather than reduce interest rates, mortgage lenders were better off engaging in product innovation to grow their home loans.

He said pension backed mortgages that allow borrowers to use up to 60 per cent of their pension benefits to secure a mortgage from a bank or take an ordinary loan are among such innovations.

Kenya’s CFC Stanbic Bank for example, is among those offering its clients 100 per cent mortgage on property.

“We are providing a solution to potential home buyers who were unable to access mortgages due to the requisite deposit they must make on the property,” said Elly Odhong, the head of personal and business banking at CfC Stanbic.

However, to qualify for the loan the property must cost between Ksh3 million ($35,300) and Ksh10 million ($117,650) — a clear indication that the bank is targeting the high income earners, a statement Mr Odhong refutes.

“CfC Stanbic has aligned its mortgage finance products to appeal to a wide segment of potential home buyers and we understand that each segment is unique,” he said adding that the main qualification criteria is the customer’s ability to meet their obligations which include repaying the loan.

Barclays Bank Kenya on the other hand is advertising an 11.9 per cent interest rate, which the bank is pitching as the cheapest home loan in the market.

According to a Central Bank of Kenya mortgage finance analysis released in November 2010, average interest rates on home loans stood at 12.59 per cent for the large banks.

Real estate received the lion’s share of credit at Ksh46.52 billion which was 29.8 per cent of the total credit ($553,800 million) to the private sector in the 11 months to November 2010, according to Central Bank of Kenya’s December 2010 monthly economic survey.

In Uganda, banks have also been increasing their exposure to the real estate sector.

“The share of foreign currency loans to the building and construction sector rose to 17 per cent in February 2011, signalling banks’ rising exposure to this sector,” said the Bank of Uganda in its latest monthly economic survey of March 2011.

Building and construction only accounted for 8.9 per cent of loans in the foreign currency loans in December 2007.

This has steadily risen over the years to stand at 17 per cent as at February 2011.

Although the uptake of residential mortgages remains low in Uganda, banks are tapping into commercial mortgages.

At least four banks — Housing Finance, DFCU, Barclays and Stanbic — have reduced the deposit required by developers of commercial buildings to 10 per cent from 30 per cent.

However, Uganda’s mortgage rates remain high compared with those in Kenya.

Uganda’s residential mortgage stood at 22.02 per cent while the commercial mortgages stood at 21.81 per cent, according to BoU’s economic survey.

This means while there is more lending to the sector the mortgage rates lock out potential borrowers.

In fact, the cheapest loans were being offered to the mining and quarrying sectors (13.01 per cent) and in the manufacturing sector (15.76 per cent). Loans to purchase land attracted the highest interest rate of 26.44 per cent.

The CBK’s survey in the mortgage industry identified the four main mortgage market constraints as: Access to long term funds, low level of incomes, credit risk and high interest rates.

While low levels of income and credit risk remain out of the bank’s control, they can navigate through the access to long term funds by raising shareholder capital and lowering interest rates.

Reducing interest rates on mortgages though, comes with risks as there is the danger of consumers being exposed once interest rates rise.