The Central Bank of Kenya recently published the residential mortgage survey of 2016 which details developments and challenges in the mortgage market over the last year. In addition, the annual survey describes the size of mortgage portfolios for banks, mortgage loan characteristics, mortgage risk characteristics and the obstacles to mortgage market development.
According to the survey, the outstanding value of mortgage loan assets increased by 8.1 per cent from KSh. 203.3 billion in December 2015 to KShs. 219.9 billion in December 2016, a growth of KShs. 16.6 billion. In relation to this, the outstanding value of non-performing mortgages increased from KShs. 11.7 billion in December 2015 to KShs. 22.0 billion in December 2016, which represents 10 per cent of gross mortgage loans.
In 2016, mortgage loan accounts decreased by 1.5 percent from 24,458 to 24,085 after commercial banks tightened credit standards while the average mortgage size increased by 9% from KShs. 8.3 million in 2015 to KShs. 9.1 million in 2016 as a result of increasing property prices.
The same year saw an increment in the mortgage options for Kenyans to following the entrance of Sidian Bank in the mortgage market. In total there are now 35 institutions offering mortgages up from 34 in 2015. With respect to mortgage risk characteristics, the three main factors for households were; ability and willingness to repay, sustainability of the borrower’s income, legitimacy of the property among other factors.
For businesses, the main factors to be considered for a mortgage were the ability to pay from the cash flows and length of business operation, other existing debts etc. In general, banks mostly financed mortgages in cases where the value of the loan was less than the value of the mortgage with most banks pegging it at 90 percent maximum loan to value ratio.
Following the interest rate capping which came to effect on 14th September 2016, the rate of interest charged on mortgages was reduced significantly to an average of 13.46 per cent from 18.7 per cent in 2015, a net decrease of 5.24%. The capping law may also have increased the intake of fixed rate mortgages as variable rate mortgages decreased by 27.2 per cent in 2016. Although demand for mortgage has increased after the capping law due to perceived affordability, banks have been more rigorous with credit standards to minimize risk such that actual mortgage loans have been less than demanded.
According to the survey, some of the most notable obstacles to mortgage market development include low levels of income, high incidental costs, difficulties with property registration, access to long-term finance, high cost of land for building, stringent land laws, and others. The challenge for banks and other financial institutions is still to find the means to reach the low-income segment.