In contrast to most developed countries, the real estate industry in Kenya is dominated by cash buyers. With around 24,000 active mortgage accounts and a home ownership population estimated at well over 500,000, mortgages account for less than 5% of homes owned.When the statistics are compared to the UK where there are more than 9 million mortgage accounts representing over 35% of homes owned, it is easy to see that the mortgage industry in Kenya only scratches the surface of the potential market.
The situation tends to favour those with sufficient wealth to buy houses for cash, either as their principle residence or as an income generating asset. Some wealthy buyers own several rental properties and the knock on effect means that many more people rent their house than buy which slows down real estate development and reduces the potential growth and future wealth of the nation.
It would be easy to propose a reduction in mortgage interest rates as a solution and this would indeed have the desired effect of providing loan opportunities to more people and increasing the number of mortgage accounts and individual home owners – but banks are driven by commercial imperatives and that means making the maximum financial returns for their shareholders, so they will charge the highest rate of interest that the market will bear.
Also there are considerable administrative costs associated with mortgage loans in Kenya and bad debts have to be factored in and effectively paid for by those that pay their mortgage loans correctly and on time. All of this means that the ‘spread’, which is difference between the cost of money to the bank and the cost of money to the borrower, is likely to remain high for the foreseeable future.
In the UK the interest rate on a typical mortgage is currently around 4% and, in a highly efficient and competitive market, better deals are available. For example HSBC is currently offering a mortgage at 3.6 percent interest, fixed for two years, with free legal work and an arrangement fee of the equivalent of Kshs 225,000.
With Bank of England base rate at 0.5 percent, this deal represents a spread of 3.1 percent from which HSBC must pay for their administration costs, legal cost and bad debt provision and make a contribution to their profit. Compare this with spreads of up wards of 10 percent in Kenya and some may say that Kenyan banks are being inefficient and perhaps a little too greedy when setting their profit targets.
Loan interest rates and spreads are high in Kenya and they are likely to remain so for the foreseeable future. What is the answer? Get a loan from HSBC? In principle this could work if you are paid in UK pounds, but if you are paid in Kenya shillings and paying the loan back in UK pounds then inflation needs to be accounted for – as you buy UK pounds to repay your loan you will likely find that each month it will be costing you more Kenya shillings to do so and you will be the one bearing the so called ‘exchange rate risk’.
Superior Homes (Kenya) Ltd has developed a new product in response to the high cost of borrowing and to enable more people to buy their own homes. Buy Over the Long Term (BOLT) is a scheme that effectively bypasses the banks, cutting out the middle man and reducing interest rates by making the buyer’s money work for them directly with the developer. With Superior Homes you can select a house at a fixed price and make payments towards it over a period of up to three years.
When the house is ready the buyer can pay down the balance in cash or take small loan to pay it off. Each BOLT agreement is tailored to meet the individual circumstances of the buyer following a one on one meeting and, in the event that the buyer has a change of mind during the period of the agreement; all monies are refunded without any deductions. While not suitable for everyone, this innovative sales approach by Superior Homes with BOLT will help some buyers achieve their dream of home ownership without the need to pay huge sums of interest to the banks.
(Ian Henderson is the Managing Director of Superior Homes Kenya)