Expensive bank charges and fees triple your home loan repayments
Monday, January 16, 2023
Commercial banks now charge up to 20 per cent surcharge on mortgages in multiples before charging interest, pushing repayments to triple the loan amount, locking more Kenyans out of the average Sh9.2 million home loan.
Bank data shows interest rates for the Sh9.2 million mortgage range between 11.5 per cent and 18.18 per cent, with customers expected to pay almost three times the actual loan over the 12-year maturity, partly driven by other fees such as appraisal fees, insurance, ledger fees, legal fees, notary and valuation fees.
The latest interest rate range is higher compared to 2021 when data from the Central Bank of Kenya (CBK) showed mortgages priced from 7.1 percent to 15 percent.
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The increase occurred because the CBK increased the reference interest rates three times last year to 8.75 percent on November 23, which is the highest since September 2019, when the rate was nine percent.
“The increase (in mortgage prices) is due to the increase in the reference rate and also some banks have started applying risk-based pricing,” said John Gachora, Kenya Bankers Association (KBA) president and also NCBA Group Managing Director.
“For us (NCBA), we raised the rate on November 11. By the end of December, we saw a one percent move.”
About 88 percent of mortgage loans were variable rate by 2021, exposing borrowers to upward fluctuations in home loan prices over their lifetimes.
A floating rate means that when the CBK reference rate moves, so does the client’s rate. Rates can be increased or decreased during the duration of the loan in favor of the client or the bank.
“Banks prefer variable because they withdraw deposits with a variable rate. But if we could have long-term funds to match the long-term borrowings, then we can use a fixed rate,” said Mr. Gachora.
A mortgage loan of Sh9.2 million to be repaid over 12 years is the average that the Kenyan market had by the end of 2021. The figure may now have risen given the rise in property prices due to inflation and recovery in demand.
Borrowers now have to pay monthly repayments of between Sh118,065 and Sh150,137 to service an average mortgage in an environment where inflation has reduced workers’ wages for the third consecutive year.
The figures are based on tables developed by KBA and CBK to promote transparency and competition in the loan market.
Middle East Bank which had four mortgage accounts by the end of 2021 topped the list of expensive lenders with a Sh9.2 million loan expected to repay Sh24.9 million over 12 years.
This contrasts with the Sh17.5 million a similar facility costs at Bank of India.
Fees such as appraisal fees, insurance, ledger fees, legal fees, notary and appraisal fees cost as much as Sh2.33 million or 21 per cent of the total cost of the loan.
The Middle East Bank mortgage is rated at 17 per cent and attracts Sh2.3 million in bank charges, Sh0.96 million in external charges and Sh150,137 in monthly interest, totaling Sh12.42 million.
KCB, which has the most mortgage accounts (8,290), charges a minimum interest rate of 13 per cent, 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 values by the end of 2021.
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A salaried person taking out a home loan from KCB must open a mortgage account with an opening balance of Sh10,000 and prove that they will take home at least a third of their basic salary.
Co-op Bank, with an interest rate of 15.6 per cent, comes with a repayment of Sh20.53 million as its internal and external costs are lower than those of KCB by about Sh210,000.
Principal 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.
This is in an economy where data from the Kenya National Bureau of Statistics shows that only 79,909 or 2.9 per cent of PAYE workers on the Kenya Revenue Authority (KRA) register were earning above Sh100,000 a month by the end of 2021.
The data could mean that only a few wage-dependent people can take advantage of mortgages. Many should either be in successful companies or run a combination of employment and business to keep up with the monthly payments.
The number of mortgage loans has fallen for two years in a row, ending at 26,723 in 2021 compared to 27,993 in 2019, a drop of 1,270 as maturities exceed new requirements.
It is a market with an estimated annual demand of between 200,000 and 250,000 housing units. Many banks in the past have cited a lack of long-term funding for mortgage loans as a reason for high prices and lower uptake.
CBK data shows that only 2.65 per cent of Kenya’s 66.3 million bank accounts held more than Sh100,000 by the end of 2021.
Most banks peg mortgage loan amounts to less than 90 per cent of the property’s value, indicating that the actual average price was higher than Sh9.2 million.
Commercial banks usually require customers to meet a cash deposit threshold to qualify for a mortgage.
However, several lenders such as Stanbic and NCBA offer mortgages of up to 105 per cent, which cover fees and commissions charged by external parties such as solicitors and surveyors.
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