30 January 2013

Kenya: 'Super-Spreads' Emerge in Mortgage Financing

Reluctance by banks to cut mortgage rates has created 'super-spreads' in the mortgage financing market, according to the latest report by HassConsult and The Mortgage Company.

The report says the banking sector may be seen to be cautious ahead of elections, but there is also a possibility that lenders have taken to profiteering.

Mortgage rates have remained unmoved since the last Central Bank Rate cut on January 10 (almost halving the 18 per cent level of December 2011) to 9.5 per cent, leaving borrowers paying almost double the benchmark rate.

Interest rate spread is the extent to which the interest earning capacity of an asset exceeds or falls short of its interest cost obligations.

"It is interesting to see how fast banks took up their rates when on the rise versus the deafening silence when the rates have come down over the last two announcements," said Caroline Kariuki, herself a former banker and now managing director of independent mortgage brokerage firm TMC.

Our calculations from data compiled in the report show the average mortgage rate in the market at present stands at 17.7 per cent. As at January 14, Barclays topped the mortgage rate league table with 15.5 per cent, followed closely by StanChart with 15.9 per cent. Stand-alone mortgage lender Housing Finance stands ninth with 18 per cent.

State-owned Consolidated Bank is the most expensive at 20 per cent, with NIC Bank just a step ahead of it with 19.5 per cent. All the rates are variable.

"We in the housing market are seeing this very difficult spread levels - which have a huge impact on the economy - but can't quite understand why the wide spreads persist," said Jenny Luesby, a consultant for the Hass Property Index.

The report shows that at current rates, mortgage buyers are in loss-making territory since total returns from a mortgage buy - which is the house price capital appreciation plus annual rental income - falls below the annual cost of a mortgage.

"It is difficult to get any real return when borrowing rates are higher than the yields," said Nathan Luesby, a consultant for the Hass Property Index and the managing director of online property listings platform JengaWeb.

Housing shortfalls in the middle-income segment are expected to persist through 2013 arising from the high interest rates in 2011/2012 which delayed and halted many projects.

"There should be good stock coming into the market in 2014 as these new projects near completion," the Mortgage Market outlook report reads.

Though CBR cuts have failed to trigger mortgage rates reduction, they have stimulated a revival in project financing, according to the report. "We are seeing many developers return to construction and new projects commencing," Kariuki said.

The report says there was a huge demand for project financing in the last quarter of 2012, with most developers taking a positive outlook.

Lenders are expected to slash mortgage rates if elections pass peacefully. "We see more of volume-driven approach likely to return as the case was before," she said.

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