Banks front low-cost housing as key to higher mortgage uptake

Low levels of income remain key hindrances to individuals seeking home loans. This is as the number of annual mortgages hit 30,000 despite the economic difficulties the financial market encountered last year.

While these difficulties resulted in an increase in non-performing loans (NPLs) by Sh3 billion, a new report by the Central Bank of Kenya (CBK) fronts the provision of low-cost housing as the key to spurring mortgage uptake. 

This increase had the non-performing mortgage loans to gross mortgage loans ratio at 14.4 per cent in December 2023, an increase from 11.4 per cent in December 2022.

The Bank Supervision Annual Report 2023 reported 30,015 mortgages in the year up from 27,786 in 2022.

“This was an increase of 2,229 mortgages or eight per cent. This was mainly due to new mortgage loans granted in the year,” the report says. 

For years, the number of mortgages has oscillated around 26,000 and 27,000, increasing only by 1,000 or so new mortgage accounts annually. 

The average mortgage size however remained the same at Sh9.4 million, which the regulator explains is due to higher values of home loans advanced in the year. 

During the period, the average loan maturity was 11.7 years with a minimum of five years and a maximum of 18 years in 2023, as compared to an average loan maturity of 10.9 years with a minimum of five years and a maximum of 20 years in 2022. 

“This is an indication that banks increased the period of mortgage facilities in 2023,” the report says. 

The average mortgage size of Sh9.4 million and the loan maturity of 18 years paint a picture of a sector that still favours a higher-income economy.

According to the report, a low level of income was mentioned as the leading impediment to access to mortgage followed by the high cost of property purchase and lack of long-term finance for financial institutions. 

All the above challenges are financial - either to the banking industry or the consumer. 

Among the solutions suggested by bankers is making available low-cost housing and increased focus on affordable housing. 

“Availability of affordable long-term funds through initiatives such as the Kenya Mortgage Refinance Company (KMRC),” the report suggests. 

The entry of KMRC into the sector in 2019 gave banking institutions the confidence to lend to borrowers, not only for a longer period of up to 25 years but also at a single digit as per the model of refinancing. 

The report indicated that eight institutions had advanced mortgage refinancing from the KMRC in 2023, as compared to five institutions in 2022. 

“Eight institutions had outstanding facilities amounting to Sh18.1 billion in 2023, as compared to five institutions with outstanding advances of sh6.9 billion in December 2022,” the CBK report states.  Banks have also suggested the finalisation of the digitalisation of the land registry processes to support the mortgage documentation process, provision of basic infrastructure services to developers by national and county governments, and streamlining and simplifying of the legal and regulatory process governing the mortgage sector, for transparency, efficiency and certainty.

Land laws

The lengthy process of security realisation in case of default, limited consumer knowledge of mortgage products, stringent land laws and credit risk rank low in mortgage obstacles. 

The capability of repayment by households and the nature and duration of the employed are among the risk factors banks look at when individuals apply for mortgages. 

The age of the individuals, their credit score, sustainability of debt service and, how easy is it to dispose the property in case of default are the other factors.  

For businesses, the ability to pay from the available cash flows is key. This is checked against the type of business, turnovers, past loan repayments, industry performance and duration in which the business has been operational. 

CBK foresees the mortgage market remaining stable this year, banking this on the affordable housing programme.

“Government focus on affordable housing, availability of discounted long-term financing from institutions like KMRC and partnership of developers with financiers to provide affordable housing projects will increase the demand for mortgages,” the regulator says.