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High rates stoke fears of housing crisis

Posted by Administrator on December 10, 2011

Elizabeth Ngigi, an auditor, took a Sh5 million mortgage two years ago to buy a three-bedroom house in Kahawa Wendani, in the outskirts of Nairobi.

The interest rate for the facility was 10 per cent, which means she was paying a monthly instalment of Sh53,730. She would have paid Sh9,6071,466 at the end of the 15-year mortgage.

Ordinarily, that was affordable for the 27 year-old who earns a net salary of Sh80,000. But now it’s not.

At the end of last month, the bank sent her a note — the fourth since she took the facility — saying it had adjusted the lending rate to 23 per cent, pushing her monthly repayment to Sh99,083.

A quick calculation shows she would have paid Sh17,834,970 — more than triple the amount borrowed, assuming the rates remain at 23 per cent — after 15 years

“I’m left holding on a loan which I can no longer afford. I regret it” Ms Ngigi said.

The steep rise in interest rate has come as a shocker to Kenyans whose spending habits were shaped by years of relatively low cost of borrowing. Each increase of 1 percentage point in rates adds as much as 10 per cent to the total cost of a home, real estate analysts said.

These are the realities facing at least 16,000 Kenyans with mortgages. Rising lending rates have significantly pushed up the cost of mortgage, making it unattractive to both existing and potential customers.

“If the raise is sustained for more than six years, then banks are in for some defaults,” said Mr Kabaki Wamwea, a director at County Developers, a real estate firm putting up houses in Ruaka, Nairobi.

“Mortgages remain a critical option in the real estate sector and no economy can expand home ownership without it. We are seeing the rise in lending rates as a temporal trend.”

Central Bank of Kenya (CBK) last week increased its indicative lending rate to 18 per cent, prompting banks to take cue.

Housing Finance, for example, raised its lending rate to 23 per cent for new clients and 16.5 per cent for existing customers, up from 14.5 per cent.

The surge in mortgage rates has mostly affected those who are holding variable and part-fixed rates arrangements. For variable mortgage rates, a bank can adjust the rates as it may determine and repayments are adjusted similarly.

For part-fixed mortgage rates, repayment is at a defined rate for the first 1 to 5 years and may be renewed on expiry.

Most lenders ask for at least 10 per cent of the value of the property — as down payment. Others ask for as much as 5 per cent of the value of the property for mortgage processing, while legal fees and commitment fees gobble up another 7 to 9 percent of the value of the property.

Ms Ngigi paid about Sh1.1 million before the mortgage could be approved.

The first time the bank raised the rate to 13 per cent, she thought that was the worst it could get. This automatically pushed the monthly repayment to Sh63,262 (she would  have paid Sh11,387,179 at the end of the 15 years.)

At this point the cost of the house doubled while its value or  rental income would ordinarily not have risen by that margin.

A further surge in the lending rate to, say, 30 per cent — which market analysts see as just months away should the CBK continue to pursue the high interest regime — would increase the monthly instalment to Sh126,485.

The total amount payable after 15 years will have accumulated to Sh22 million — four and a half times the value of the house when Ms Ngigi first applied for the mortgage.

“We have had to raise our rates. But we don’t want the loans to go bad. We are holding discussions with our clients to see how best we can approach this issue,” said Mr George Laboso, head of mortgages at Family Bank.

The bank has since August given mortgages worth at least Sh1 billion.

“We are telling our customers we are ready to extend the period from, say, 10 years to 15 years to reduce the  burden on them” Mr Laboso said.

But will house prices keep rising to make sense for people like Ms Ngigi to hold on?

At present, demand for housing in urban centres has outstripped supply by at least five times, according to the Kenya National Bureau of Statistics (KNBS). This has led to high house prices, locking out low and middle-income earners from owning homes.

Less cash for investing

But economists and real estate analysts warn that if CBK continues  to raise interest rates to check inflation and stabilise the shilling, Kenyans’ purchasing power will fall, and people will set aside more money for basic goods, transport and school fees.

This would mean there will be less cash for investing in the real estate sector. Developers will have to push the cost of homes down to sell and that is where mortgage holders like Ms Ngigi will be dealt the real blow — the value of the houses they acquired at an inflated cost will start crumbling.

“We are projecting a slowdown in the mortgage business due to the high interest rates,” Mr Laboso said.

A real estate pricing boom has pushed the cost of homes to more than 140 times the annual incomes of most Kenyans, according to a survey of Africa’s housing market in March.

“In the era of high interest rates, the best strategy for potential home owners is to save more to raise a higher deposit of let’s say between 30-40 per cent” said Mr Wamwea, adding: “One can then seek a bank loan for the balance and this would be less painful.”

Source: http://www.nation.co.ke/News/High+rates+stoke+fears+of+housing+crisis+/-/1056/1286944/-/3uhxl5z/-/index.html

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6 Responses to “High rates stoke fears of housing crisis”

  1. Wamaitu said

    Oh my!

    • Kangemi said

      Oh my is right Wamaitu. This is extremely scary. The loan terms in Kenya are bad bad bad. They have the banks insulated from incidentals while leaving borrowers very vulnerable. Just like we learned from the states, Kenyans need to stop the “bandwagon” mentality – getting a house because everyone is. There simply is nothing wrong with renting…..you don’t have to deal with repairs, taxes and other costs. You can actually save a lot more as a renter…look at the Indians in Kenya…few own houses or land but they are financially miles ahead of the rest of us.

      • lakini I feel that if you stifle the economy of credit and investment tools like mortgages, refinancing and even going way back to smoke out borrowers who took their loans in 1990 and give them a whole list of wild demands…the economy will come to its knees. Soon loan sharks will be the only options….leading to subprime-credit and we will have what USA had in 2008.

      • Kangemi said

        Agreed HalfJadhe Half Kyuk (Excellent name by the way). For some, loan sharks will be the only option if credit is not easily available causing slowdown in economic growth. My thoughts are directed towards the likes of a neighbor in Kenya who borrowed heavily and built on an entire piece of land without parking for tennants. His apartments are big so they would normally attract tennants with at least 40,000 income, with big families and most of those own cars these days. You know what I mean if you have been to Kenya lately. Guess what, without parking he couldn’t rent them out. With pressure to repay the loan and the inability to attract tennants for three months, he subdivided his nicely built apartments into rooms so he can attract lower income tennants who do not own cars. He couldn’t service the loan if he didn’t have the income.

        There is a lot of apartment building in Kenya. That is the dream of many to make it these days. So, servicing loans by all means necessary without regard to repayment terms is the order of the day. I will not be surprised if a couple of banks don’t make it in the next couple of years due to heavy exposure to these types of loans. A friend once told me to be careful where I keep my money in Kenya because I stand a big chance of losing it in case of bank collapse.

        I pulled the plug the last minute on a Coopeerative bank loan in Kenya when I took my time to read the fine print. In addition to slapping every legal and government fee, they wanted 16.5% interest. That was three years ago. A friend who borrowed at the same time is currently paying 23% on a sh10million construction loan. If that is not daylight robbery, I dont know what is!

  2. That Dude said

    This is simply greed on the part of the banks. The will endup shooting themselves in the foot. If they continue raising rates, people are going to default because they cannot afford to pay. Learn from the housing fiasco in the states.

  3. The slow painful death of Wananchi. Soon there will be no credit to expand business. We will all be left to the mercy of well-connected cartels who can import credit at rates of 1% and you expect mama mboga to compete with these oligarchs while still paying 23%. Still grappling with high fuel costs, blackouts, water shortages, mungiki tax, KRA tax, City Council grease and anyway…..a customer who is already to broke to pay for what mama mboga is selling.

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