Costly bank charges and fees triple home loan repayment
Monday January 16 2023
Commercial banks are now loading up to an extra 20 percent cost on mortgages in multiple charges before they levy interest, pushing repayment to three times the borrowing, locking out more Kenyans from the average Sh9.2 million home loan.
Banks’ data shows interest rates for a Sh9.2 million mortgage is priced between 11.5 percent and 18.18 percent, with customers expected to pay almost three times the actual loan at a maturity period of 12 years, partly driven by other charges such as appraisal fees, insurance, ledger fees, legal fees, stamp duty and valuation fees.
The latest spread of interest rates is higher compared with 2021 when the Central Bank of Kenya (CBK) data showed mortgages were priced from 7.1 percent to 15 percent.
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The rise has come on the back of CBK increasing the benchmark lending rates thrice last year to 8.75 percent on November 23, being the highest since September 2019 when the rate was at nine percent.
“The increase (in the pricing of mortgages) is because of raising the benchmark rate and also some banks have started applying risk-based pricing,” said John Gachora, the Kenya Bankers Association (KBA) chairman and also the managing director at NCBA Group.
“For us (NCBA), we raised the rate on November 11. By end of December, we recorded a movement of one percent.”
About 88 percent of the mortgage loans were on variable interest rates by 2021, exposing borrowers to upward fluctuations of the home loan prices during the life of the facilities.
A variable rate means that when the CBK benchmark rate moves, the customer’s rate moves. Rates can go up or down during the term of the loan either to the benefit of the customer or the bank.
“Banks prefer variable because they are raising deposits with a variable rate. But if we could have long-term funds to match with long-term lending, then we can use fixed rate,” said Mr Gachora.
A Sh9.2 million mortgage repayable in 12 years is the average the Kenyan market had by end of 2021. The figure may have now increased given the rise in real estate prices on the back of inflation and recovering demand.
Borrowers are now required to make monthly payments of between Sh118,065 and Sh150,137 towards servicing an average mortgage in an environment where inflation has handed workers pay cuts for the third straight year.
The figures are based on tabulations developed by the KBA and the CBK to boost transparency and competition in the lending market.
Middle East Bank which had four mortgage accounts by end of 2021 tops the list of expensive lenders with a Sh9.2 million loan expected to repay Sh24.9 million in 12 years.
This is in contrast to the Sh17.5 million that a similar facility costs at the Bank of India.
Charges such as appraisal fees, insurance, ledger fees, legal fees, stamp duty and valuation fees cost as much as Sh2.33 million or 21 percent of the total cost of credit.
The Middle East Bank mortgage is priced at 17 percent and attracts Sh2.3 million bank charges, Sh0.96 million external charges and Sh150,137 monthly interest, totalling Sh12.42 million.
KCB, which has the most mortgage accounts (8,290) charges a minimum interest of 13 percent, with the borrower paying back about Sh20.74 million.
Seven large banks — KCB, Stanbic, StanChart, Absa, Co-op, Equity and NCBA — and one small bank —HF Bank— controlled more than 80 percent of mortgage accounts and value by end of 2021.
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A salaried person taking a home loan from KCB is required to open a mortgage account with an opening balance of Sh10,000 and prove they will take home at least a third of their basic salary.
Co-op Bank, at 15.6 percent interest, comes with a repayment of Sh20.53 million since its internal and external charges are lower than those of KCB by about Sh210,000.
Equity’s repayment for a similar mortgage averages Sh19.5 million while Stanbic, StanChart, NCBA, HF and Absa average Sh19.19 million, Sh19.08 million, Sh18.82 million, Sh18.71 million and Sh18.31 million respectively.
This is in an economy where Kenya National Bureau of Statistics data shows just 79,909 or 2.9 percent of pay as you earn (PAYE)-contributing workers in the Kenya Revenue Authority (KRA) register were earning above Sh100,000 per month by end of 2021.
The data could mean that just a few people dependent on salaries can tap mortgages. Many would require to be either in good-performing businesses or running a mix of employment and business to keep up with monthly payments.
The number of mortgage loans has declined for two years running, closing 2021 at 26,723 compared with 27,993 in 2019, translating into a drop of 1,270 as maturities exceed new applications.
This is in a market with an estimated annual demand of between 200,000 and 250,000 housing units. Many banks have in the past cited a lack of long-term funds for funding mortgages as the reason for the steep prices and lower uptake.
The CBK data showed only 2.65 percent of Kenya’s 66.3 million bank accounts held more than Sh100,000 by end of 2021.
The majority of the banks peg the mortgage loan amounts on less than 90 percent of the property value, indicating that the actual average price was more than the Sh9.2 million.
Commercial banks ordinarily require customers to meet a cash deposit threshold to qualify for a mortgage.
A few lenders such as Stanbic and NCBA, however, offer up to 105 percent mortgage, which covers fees and commissions charged by external parties such as lawyers and surveyors.
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