How much will Kenya Mortgage Refinancing Company save borrowers?

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

26 May 2019

The newly formed Kenya Mortgage Refinance Company (KMRC) was launched by President Uhuru Kenyatta this week. However, details of its mode of operation are difficult to come by. Nevertheless, the basic idea is to provide long-term finance to the banking sector for onward lending to home buyers.

The seed money is about Sh35 billion which be lent through the normal banking system at the prevailing market interest rate but for longer periods.

The logic behind this move is that mortgage installment amounts are high when the repayment duration is short. Thus, increasing the term of the loans should make them more manageable.

The KMRC facility will be a maximum of Sh4 million per person thus it will reach at least 6,000 people. Presumably, since it is “refinancing”, it will only be available to those who already have an active mortgage.

According to Central Bank of Kenya data, the current weighted average mortgage interest rate is about 12.5 per cent per year. Most of these loans have a term of 10 years, thus, the repayment instalment for Sh4 million comes to Sh58,550.

If such a borrower was to sign up on the KMRC facility and extend the payment duration to, say, 30 years at the same interest rate, the monthly installment would come down to Sh42,690. This is over Sh15,000 (or 27 per cent) less than before.

Anyone who is serving a mortgage will confirm that reducing the monthly payment by Sh15,000 is a very welcome relief!

Still, the Central Bank estimates that the average mortgage in Kenya is about Sh11 million. Such a loan on a ten-year term and 12.5 per cent interest will need Sh161,014 in monthly installments.

If the borrower is offered Sh4 million on the KMRC facility, the balance of Sh7M would still need to be serviced on the old terms – 12.5 per cent for 10 years. This comes to Sh102,463 for the Sh7M.

Then there is the Sh42,690 for the KMRC facility which brings the total monthly payment to Sh145,153. The borrower still saves the same Sh15,000, but now the percentage drop is much smaller – about 10 percent.

The question lingering in the air is this: wouldn’t it be better to reduce the interest rate for the KMRC facility? After all, who wants to spend the next 30 years pay a loan?

Let us investigate. We have seen that increasing the term from ten years to thirty reduces the repayment of a Sh4M loan at 12.5 per cent from Sh58,550 to Sh42,690. What interest rate would have the same effect but leaving the duration constant?

It turns out that the interest rate would have to come down to about 5 percent; and, at level, the repayment comes to Sh42,426 per month for ten years. Is this a feasible solution?

I don’t think so. Media reports indicate that the banks will be getting this money from KMRC at 5 per cent. It is unreasonable to expect them to lend it forward at the same rate.