Mortgage Heritage

13 Mar

I’m going to talk to the banks. And I’m going to be frank. Because it doesn’t make economic sense to have a growing deficit of housing units, currently standing at over 200,000 and increasing every year, have stagnating high house prices because of low intake, have only about 20,000 mortgage accounts and still maintain high interest rates. There’s no tingle to own a home yet.

Picture this. Only 50,000 units are developed by the government and private developers every year. And with that now wrinkled statement of an expanding middle class, whose spending power is a sweetener for any business, the deficit will continue increasing at an increasing rate. So why is it that it’s rentals, not property sales attracting a high demand?

Interest rates. They are at an absurd high. The average lending rates are at about 16.89%, with some heading towards the 20% mark. With the Central Bank Rate being at 8.5%, it borders on frustrating why only a few people can afford mortgage facilities. It’s expensive owning a home.

There’s obviously a desire for home ownership but banks prefer to focus on commercial and personal unsecured loans, ignoring the fact that such loans are risky and suspect to default given the high interest rates. One can lose their job or the business can collapse, but a mortgage provides a more secure lending for the bank because it can reposes the property.

The interest rate regime has to come down and the banks can even rake in more revenues. For instance, a sh7million, at 16.5% for a 20-year loan tenure, gives monthly installments of sh100,000. The total interest payable over that period will be a whopping sh17million! The total cost of the house will be sh24 million; that’s like owning 3 houses of the same value and good SUV to boot.

Reduce the rates to about 10% and increase the mortgage sales. That sh7 million house will now cost sh68000 per month. It will seem affordable to potential first time homeowners as it will be sh32,000 less in installments. That can entice more qualified people and two mortgages of the same value can bring in sh136,000 per month for the bank. That’s more than the prohibitive sh100,000.

Even at an appreciation rate of about 8% p.a., which still fluctuates given market, infrastructure and maintenance conditions, the rates of return are still low, what with interest rates making up about 70% of the total cost.

Developers are being left with unsold units, landlords are busy looking for other means to finance properties and many individual home owners not making any profits on rental income, since the annual mortgage costs are more than the appreciation of a house and rental income combined.

There are definite long-term benefits of owning a home, as one can utilize that asset in the future, not forgetting the security and peace of mind that comes with it. But for many to enjoy such benefits, cheap mortgage rates are crucial, well, coupled with tax reliefs and a reduction in property prices. Banks and other financial institutions have to show more interest and make funds available to make housing affordable and increase mortgage uptake.

Otherwise renting will always make sense than owning a home. Ask anyone.


Posted by on March 13, 2014 in Personal Finance


3 responses to “Mortgage Heritage

  1. wanjoro

    March 13, 2014 at 5:11 pm

    Hey. Maybe because I’m lucky to already have a home without a mortgage, its been easy for me to judge those paying. 100k in rent wondering why they can’t just take a mortgage, but your article is eye opening. As usual. Thanks

  2. Domi

    December 9, 2014 at 12:36 am

    Now I see why L would not want to buy a home. But is mortgage the only option? Nice Piece though.


    April 17, 2015 at 11:12 am

    For one reason or another, I can’t see all of this article, the text keeps hiding? Are you utilizing something crazy?


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