Active Mortgages Dip As a Result of Interest Capping Rate

The coming into force of the interest capping law has led to the dipping of active mortgages from 24,458 to 24,085, a 1.5 percent decline.

According to an analysis done by Cytonn Investments Limited, before the Bank Amendment act of 2015, the average interest rate on a mortgage in 2015 stood at 18.7 percent ranging between 11.9-23.0 percent.

This, however, dropped to an average of 13.5 percent as at 2016 (CBK) with a range of 10.5-18.0 percent due to the interest rates cap law.

Despite this, the number of active mortgages dropped by 1.5 percent in December 2016 to 24,085 from 24,458, attributed to tight credit standards employed by banks as they would prefer the less risky government securities following the capping of bank interest rates, currently at 13.5 percent.

The lowering of the interest charged on mortgages was meant to have more Kenyans access the much-needed funds and construct houses. Banks, however, restrained themselves from lending and just as the rate has been unfair to most of those seeking loans, the mortgage sector was not spared.

Lack of proper funding for real estate developments has resulted in excessive debt financing, resulting in increased financing costs owing to the extended project time frames.

The Banking Amendment Act 2015 continues to impact on development activity as financial institutions deprive the private sector of credit which stood at 2.1 percent as at April 2018, compared to a 5-year average of 14.0 percent between 2013 and 2018.

Land prices in Nairobi are relatively high with an average price per acre of 222.6 million shillings that is for high rise, low rise, and commercial areas.

In satellite towns where land is relatively affordable, with an average price per acre of 17.0 million shillings there is inadequate trunk infrastructure, and the developer has to provide, this ultimately leads to increased construction costs for developers amidst waning private sector credit growth.