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Crippled Dreams for Kenyan Properties Servicing Mortgages

Increasing interest rates charged on loans has worsened mortgage uptake in Kenya and forced prospective homeowners to look for alternative ways of owning homes.

Less than two years ago, commercial banks and mortgage institutions charged an interest rate of about 14 per cent, which was unaffordable for many Kenyans. The situation is now worse with many charging between 19 per cent and 24 per cent, ranking them among the highest in the world.

To allow the mortgage firms and banks to adjust their interest rates, a hidden clause, which indicates that interest rates would be pegged on inflation rates or trends, is incorporated in the agreement.

Mortgage apathy

The situation has forced many borrowers to drastically raise their monthly installments to match the new interest rates.

Tom Njoroge and his wife Joyce are among borrowers who are paying dearly due to the increased interest rates. Three years ago, the couple took a mortgage of Sh5 million to buy a house in Mlolongo, Nairobi, at an interest rate of ten per cent. The interest rate has now more than doubled to 23 per cent, leaving the couple stranded.

They were to pay monthly instalments of Sh53,730 for 15 years, making the total Sh9,607,486. This changed last year when the commercial bank sent them a letter indicating that the interest rates had been adjusted to 23 per cent.

Consequently, their monthly instalments shot to Sh99,083, meaning they would end up paying Sh17,834,970 to own the house.

Our dream family home is now a mirage, as we are stuck with a mortgage we cannot service, says Njoroge.

There are many such mortgagees who have not only been forced to abandon their dreams of owning homes, but have lost millions of shillings in mortgage deposits and already paid instalments.

A recent World Bank study revealed that only 16,000 homes have been successfully bought through mortgages since Independence.

Because of the unaffordable interest rates, some buyers are now opting to enter agreements with sellers and private developers, some of which allow them to live in the house as they pay flexible instalments.

Take the case of Bernard Ochieng and his wife Sandra who recently bought a three-bedroom house at Eliking Court Apartments in Ngong.

We accepted the offer after agreeing with the private developer, in writing, on the mode of payment, says Ochieng.

The couple paid a deposit and agreed on a monthly instalment to be spread over three years.

High risk

The beauty of the agreement is that the instalments will never be increased as in the case of mortgages, says Ochieng.

According to the directors of Eliking Enterprises Ltd, the developers of Eliking Court Apartments, mutual agreements are the way to go in the face of high interests that have pushed mortgages beyond the reach of many.

Majority of our prospective buyers shied away from loans after banks and mortgage firms increased interest rates to 24 per cent last year, says Trudie Rattray, one of the directors, adding that all the buyers who shelved plans to purchase cited the high cost of borrowing.

We had to come up with a system where the buyer and the seller are comfortable with the transaction, Rattray says.

James Oywera, another director at the company, says they draw legal agreements in which buyers pledge to complete payment on mutually-agreed instalments within five years.

We even let the buyers occupy the apartments any time they desire before completing payment, says Onywera.

Rattray says the mode of payment has several advantages to both parties.

Sacco loans

It is quicker than the bank process and gives developers time to continue working as the new owner moves in, she says.

She argues that it is a humane way of doing business, adding that it forms a future marketing strategy.

The mode of payment, however, has its disadvantages.

Instalments may not be pegged on inflation rates, like mortgages, but could be higher due to the short payment period, Onywera says.

He says it could be costly on both parties should the buyer default on payment as agreed in writing.

There is also an element of risk involved due to necessity of trust from both parties, Onywera says.

In Kisumu, Jadali Properties welcomes alternative modes of payment for its maisonettes at Kajulu Gardens.

Jadali Properties managing director Prof Walter Jaoko says many of their buyers prefer to pay a higher amount in cash as down payment.

The company has embraced mutual agreements for its development at Konya Hill Top in Mamboleo, Kisumu.

We allow possession of the house and staggered balance payments up to 18 months for buyers who pay 70 per cent down payment in cash, says Jaoko.

According to lawyer Peter Mwangi of MP Mwangi and Company Advocates, prospective home buyers are wary of defaulting on mortgages.

Repercussions like foreclosure, whereby the bank stops the buyer from paying and seizes the house, is a nightmare to many, says Mwangi.

Foreclosure allows the lender to move to court to get orders to take over the property as owner.

The bank or mortgage firm can also seek orders to sell the house should the buyer default for three months, he says.


Mwangi explains that courts often issue orders that the house be sold either in a public auction or private contract.

The court can also appoint a receiver manager to collect rent for the property and pay the lender until the whole amount is paid, he says.

Moreover, failing to pay up two or more mortgages may also end up being a nightmare.

The court may order the mortgages consolidated and the debts settled together, Mwangi explains. 

According to the chief executive officer of Mombasa-based Myspace Properties, Mwenda Thuranira, the property and homes market has matured in leaps and bounds, but the high interest rates placed on mortgages may affect the market this year.

Thuranira, however, says the high interest rates may not scare off all prospective investors because some of them buy homes through Sacco loans and employers’ investment plans.

We enter mutual agreements with buyers to pay in instalments, but not specifically to mitigate high interest rates by banks, he says.

Thuranira says Myspace Properties has agreements with clients on payment of instalments.

It depends with the nature of the sale and relationship with a particular client, but not necessarily to cushion from runaway interest rates, he says.

Source: The Standard

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