You must have seen it by now: the dance craze where people go down as low as their limbs would allow. They are overjoyed and in one accord. But even before you can get a clue to what the excitement is all about, the dance ends abruptly with the message: “You’ll be amazed at just how low we can go with our mortgage rate.”

It is only then that you realise that the commercial is actually not about a dance competition, but about Barclays Bank’s new interest rate. At 11.99 per cent, Barclays is currently offering one of the lowest mortgage interest rates in the market.

And they are not quiet about it. From early last week, the bank has been on the offensive with a major advertising blitz both in print and electronic media, touting its new rate as “one unmissable deal”.

Major role in market

Whether other banks will take the cue and lower their mortgage interest rates is still not clear.

However, what is clear is that the rate of interest charged on mortgage loans is going to play a major role in determining market share in the coming months as commercial banks and other home loan lenders compete for the few mortgage-eligible Kenyans.

On Saturday last week, for instance, Kenya Commercial Bank’s S&L Mortgages lowered its mortgage interest rate by one per cent — from the normal 13.5 per cent to 12.5 per cent — for the over 200 people who participated in the Property Bus Tour it had organised that day for potential home buyers and real estate investors.

Reduced appraisal fee

It also reduced appraisal fee from one per cent to 0.5 per cent. But the special rates would be enjoyed only by those who signed up for mortgage that day, S&L director Caroline Kariuki said as she flagged off the buses carrying the participants.

Such gestures are good, but still very far from being enough to make mortgage accessible to a majority of Kenya’s working class. If we are to see any meaningful growth in the mortgage sub-sector, banks must reduce their lending rates.

Currently, it is estimated that banks charge 14.07 per cent mortgage interest rate on average. But some charge as high as 18.5 per cent. How many Kenyans can afford this, especially in view of the high property prices?

Interest rates play a major role in determining how many people sign up for a mortgage in any economy since it forms a major component of the cost of borrowing.

Indeed, experts agree that the two most important factors that borrowers consider before taking any loan are the loan interest rates and the amount to be repaid per month.

A Central Bank of Kenya report on the status of the country’s mortgage market released early this year said that the potential mortgage market in Kenya is worth around Sh1.1 billion.

However, the survey said the market was being crippled by, among other factors, high interest rates. This, the report noted, had made Kenya’s total mortgage debt to stand at only 2.4 per cent of gross domestic product, compared to South Africa’s 30 per cent.

High interest rates are not only bad for borrowers, but also for the whole market. For instance, as a result of high interest rates in the 1990s, a large number of loan recipients defaulted, leading to repossession of their properties, which were eventually auctioned.

Now, auctioning or forced sales dampen the property market since the offloading prices are not at par with the market value of the property in question. Such moves also scare away potential property investors.

Is appealing for lower mortgage rates asking for too much? No.

We know that, currently, commercial banks and other mortgage institutions have “special mortgage arrangements” with employees of some specific blue chip companies who pay rates as low as six or even five per cent on their home loans.

Why can’t they extend the same to other salaried people?

via Daily Nation read the rest here