The Mortgage Option Explained

With the various misconceptions and lack of data about the current mortgage situation in Kenya and its viability, this article sheds little light on it.

The Mortgage Option Explained

One advantage of the mortgage option is that a buyer gets an opportunity to own property without having to pay for it all at once. 

You might ask, what is a mortgage? A mortgage is a financial plan where an individual or a business entity interested in a real estate property uses the property as collateral to secure a loan from a financial institution to acquire that said property.

The idea is mostly popular in middle-income economies where the interest in property ownership is high but finances remain a limitation, for example, in a country like Kenya.

According to a 2010 survey by the Central Bank of Kenya, the mortgage market at the time had more than tripled in a five-year period. The market grew from Kshs. 19 billion in 2006 to just over Kshs. 61 billion by mid-2010 (nominal growth).

This translated to annual average growth of 34%, indicating an exponential increase in mortgage loans. However, the mortgage uptake in the country is still low and has surprisingly started to go down. For instance, statistics indicate that mortgage loans dropped to Ksh104.8 billion in 2016 from Ksh106.3 billion in 2015.

While other factors may have influenced the variation, the fear is largely due to the financing cost where the interest is currently charged at about 13.5%. Despite this being a reduction from the previous average rate of 18% following the passage of an interest capping law, the rate is still high (compare with the US which is at about 4%).

An economic survey by the Kenya Bureau of Statistics indicated that most of the middle-class population dreams of owning a home. The middle-class in the country accounts for about 45 percent of the total population. Yet, the bank charges are high due to the lack of long-term funds as they majorly rely on deposits that are on a short-term basis.

Many prospective property buyers are now looking for alternative plans to help them achieve their dreams. The whole conversation raises the question as to whether mortgages are expensive and what needs to be done to make housing affordable in Kenya.