How KMRC will achieve cheaper home loans in Kenya

There are two essential parts to achieving affordable housing in Kenya: building decent, low-cost homes and developing a housing finance market that enables low-income earners to buy those homes.

Without finance, almost no price for a home is low enough to accommodate an average salary. Generally, there is a shortage of long-term funds in the Kenyan banking sector.

To cushion themselves against the risk of asset maturity mismatch, banks have traditionally charged high, variable interest rates on mortgages.

For SACCOs and microfinance banks, which are big providers of housing finance to the lower end of the market, the available mortgage loans have short repayment periods of up to five years, because these lenders lack long-term funds.

They rely on short-term customer deposits as their main funding source, restricting their loan book size and capacity to lend long-term.

Short repayment tenures, coupled with floating interest rates, impact negatively on the affordability of housing loans.

For instance, taking a Sh2.5 million mortgage loan at the current average interest of 12.5 percent over a repayment period of five years would require a borrower to have a monthly income of Sh169,000 for a financial institution to underwrite the loan.

This is a tall order for millions of households in Kenya where only about three percent of salaried workers earn more than Sh100,000 per month.

However, if the repayment period for the same Sh2.5 million housing loan is extended to 20 years, for instance, the income eligibility threshold drops steeply to Sh85,000, bringing more workers into the bracket of those who qualify for home loans.

Besides enabling more households to qualify for mortgages, longer maturities offer borrowers more breathing space for loan servicing, freeing up cash for other uses and allowing them to better manage their monthly budgets.

KMRC seeks to address the shortage of long-term funding by mobilizing long-term capital and making it available, at affordable rates, to mortgage lenders for onward lending to their customers.

This will ensure that local banks are able to match the tenure of their assets with that of their liabilities, greatly reducing the interest rate on home loans and making the regime stable and predictable during the life of the facility.

KMRC has been active in mobilizing concessional financing to support the Kenya Affordable Housing Finance Project (KAHFP).

With a $250 million (Sh25 billion) long-term funding from the World Bank Group and a further $100 million (Sh10 billion) from the African Development Bank (AfDB), KMRC will help address existing liquidity mismatch between short-term customer deposits held by banks and SACCOs and long-term loans.

The company will lend to participating mortgage lenders, allowing them to increase the repayment duration of their loans. These lenders will keep doing what they usually do, assessing customers’ credit risk and making decisions on whether to lend or not, but they will have many more customers eligible for a long-term mortgage loan.

With this financing, KMRC will be able to make long term loans available, at a fixed rate, to financial institutions, so they can pass on these benefits to the end borrowers.

With more time to repay, monthly payments will decrease, making these loans more affordable.

The inclusion of SACCOs and Micro Finance Banks in this model is significant because they already play a big role in the home loans market, accounting for over 90 percent of housing finance in Kenya. Their entry will broaden the scope of mortgage lenders and heighten competition, improving the deal for prospective borrowers. True, these new players have extant capacity challenges, which KMRC is already addressing by strengthening their mortgage origination and underwriting processes.

Increased competition due to more institutions coming into the mortgage market will give borrowers more choice thus the potential for cost reduction both in terms of loan pricing as well as processing fee which currently stands at an average of 2-4 percent of the loan amount.

Although lower interest rates are preferred, they are often driven by the government’s cost of borrowing, so any rate below that of Government securities is not sustainable in the long term.

However, injecting long-term funds into the financial system is a sustainable way to make housing finance more affordable.

KMRC will tap the bond market where there is a large base of institutional investors (pension funds, insurance companies) interested in long-term, high-quality paper.

Bond proceeds will be used to extend additional long-term loans to banks and SACCOs, ensuring sufficient liquidity.

That way, KMRC will effectively help mobilize existing long-term funds into the housing finance market.