A Beginner’s Guide to Understanding Mortgage Loans in Kenya

Purchasing a home is a highly-discussed topic, and one of the avenues to achieve homeownership is by obtaining a mortgage. However, mortgages sound like an enigma to many people. From the vocabulary to documentation, the process can seem quite frustrating. In this blog we will break down the basics of mortgages and how exactly mortgages work.  

What is a Mortgage? 

A mortgage is a home loan from a financial institution to purchase or construct a house. You pay the loan back monthly, over a period of years. The financial institution extending this home loan could be a bank, Sacco or a mortgage finance provider. It is a way in which one can buy property or offer the said property as security to a financial institution.

READ ALSO: Mortgage Application Process in Kenya: Step-by-Step Guide

Types of Mortgages in Kenya?

1. Fixed Rate Mortgages

When opting for a fixed-rate mortgage, the interest rate remains unchanged throughout the entire mortgage term, typically ranging from 15 to 30 years. This type of mortgage shields you from market fluctuations, which can work both in your favor and against it. On one hand, you may miss out on potential interest rate reductions if market rates decrease during your mortgage period. Conversely, you’ll be safe from significant interest rate hikes if market rates rise.

While fixed-rate mortgages offer budgeting stability, it’s important to note that the initial deposit tends to be higher compared to other mortgage types. Additionally, a longer repayment period results in paying more interest, making the overall debt more expensive. It’s advisable to apply for a fixed-rate mortgage when the current market rates are not high.

Variable/ Adjustable Rate (ARM) Mortgages

Variable or adjustable rate mortgages (ARMs) feature interest rates that fluctuate over time. Typically, the initial interest rate is lower and remains fixed for a predetermined period, often around five years. After this period, the interest rate adjusts periodically based on an index and an agreed-upon margin. The index, such as the LIBOR rate, Central Bank of Kenya (CBK) rate, or treasury bill (T-bill), reflects prevailing market rates. The margin is the additional rate agreed upon above the index rate. For example, if your margin is 1.5%, your ARM will be calculated as the LIBOR rate + 1.5%. ARMs are advantageous when prevailing rates are low since you’ll pay lower amounts during the initial fixed-rate period.

What Is the Security for the Loan Facility?

The security will be the property being financed, hence the lender will take the first charge on the property.

Who qualifies for a mortgage loan?

To qualify for a mortgage loan, several factors are typically taken into consideration by lenders. While specific requirements may vary between lenders, here are some common qualifications:

1. Income or Employment: Lenders assess your income stability and employment history to determine your ability to make regular mortgage payments. A steady job with a consistent income stream is generally preferred.
2. Creditworthiness: Your credit history and credit score play a significant role in mortgage eligibility. Lenders evaluate your creditworthiness to assess the risk of lending to you. A higher credit score and a positive credit history increase your chances of qualifying for a mortgage.
3. Down Payment: Most mortgage loans require a down payment, which is a percentage of the property’s purchase price paid upfront. The amount varies but is often between 10% to 30% of the property value. Having a larger down payment demonstrates financial stability and may improve your eligibility.
4. Property Appraisal: The property you intend to purchase also affects your mortgage eligibility. Lenders usually require a professional appraisal to assess the value and condition of the property.

It’s important to note that these are general qualifications, and each lender may have specific criteria and requirements. Consulting with lenders or mortgage professionals can provide more accurate information based on your unique circumstances.

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What are the Available Property Finance Loans in Kenya?

In Kenya, there are various types of property finance loans available to cater to different needs and circumstances. Some of the common property finance loans in Kenya include:

1. Home Purchase Loans: These loans are specifically designed to help individuals or families purchase a residential property. They provide financing for buying a new or existing home, allowing borrowers to spread the cost over a longer period.
2. Mortgage Refinance Loans: Refinance loans are meant for homeowners who already have an existing mortgage but want to replace it with a new loan that offers better terms, lower interest rates, or additional funds for other purposes.
3. Construction Loans: Construction loans are designed for individuals or developers who plan to build a new property from scratch. These loans provide funding in stages or as needed during the construction process.
4. Equity Release Loans: Equity release loans allow homeowners to access the equity built up in their property without selling it. This type of loan is suitable for individuals who want to unlock the value of their property for various purposes, such as home improvements, education expenses, or debt consolidation.
5. Commercial Property Loans: Commercial property loans are specifically designed for businesses or individuals looking to purchase or develop commercial properties, such as office buildings, retail spaces, or industrial properties.

How do I Know Which Mortgage I Can Afford? 

This depends on your income and the property you are buying. If you are submitting a mortgage application, your level of debt commitment matters as a prudent lender what we want to see is that you are not highly committed in debt.

When applying for a mortgage, try to clear the small and short-term debts. This will demonstrate that you manage your funds responsibly and that you are fit for a long term mortgage commitment, and the more you can save up to put down as a deposit, the lesser the debt obligation that you will have with the Bank.

The Bank will also view you as a more serious customer hence a better credit appraisal score. In regards to your income, we will want to see proof of how much you earn.

You need to produce at least 3 months’ payslips and 6 months’ bank statements if you are employed or the latest 12 months’ statements if you are self-employed or in business. This will allow us to look at how much has been coming in as well as your outgoings.

In reference to the property avoid signing a property sale agreement before you get a loan application approval, signing a property sale agreement can have penalties in case you are not able to honour all the terms and conditions in the agreement. 

What Other Additional Costs Are There?

Different lenders may impose a variety of additional fees when applying for a mortgage. Here are some common fees:

1. Legal Fees: These fees cover the cost of legal services and can vary based on the loan amount and complexity of the transaction.
2. Stamp Duty: This fee is required for the registration of documents involved in transferring ownership of the property.
3. Insurance Fees: Mortgage lenders often require borrowers to have insurance coverage, which can include life insurance and property insurance.
4. Valuation Fees: A certain percentage of the property value may be charged as a valuation fee to assess the worth of the property.
5. Ledger Fees: These fees are associated with the maintenance of the loan account and can vary depending on the bank’s charges.
6. Negotiation Fees: Some lenders may charge a percentage of the property value as negotiation fees, particularly in cases where a mortgage broker or agent assists with the negotiation process.

It’s important to note that the specific fees and their amounts can vary between lenders and individual loan agreements. It is advisable to carefully review the terms and conditions provided by the lender and seek clarification on any additional fees before finalizing the mortgage application.

Mortgage Lenders in Kenya

There are several mortgage lenders in Kenya that provide financing for property purchases. Here are some well-known mortgage lenders in Kenya

1. Standard Chatered Bank

Standard Chartered Bank Kenya offers a range of mortgage options to assist individuals in purchasing or refinancing residential properties. Whether you’re looking to buy a house, apartment, or plot of land for construction, Standard Chartered Bank Kenya provides financing solutions. They also offer mortgage refinance loans for borrowers looking to improve their loan terms or access additional funds. With competitive interest rates and flexible repayment options, Standard Chartered Bank Kenya aims to meet the diverse needs of borrowers. Additionally, they provide construction loans for those looking to build their dream home from the ground up. To learn more about their mortgage products and eligibility criteria, visit their official website, contact their mortgage department, or consult with a Standard Chartered Bank Kenya mortgage special.

2. NCBA Bank Kenya

NCBA Bank Kenya offers a diverse range of mortgage products to facilitate the purchase or refinancing of residential properties. Whether you’re seeking to buy a house, apartment, or plot of land, NCBA provides financing solutions tailored to your needs. They also offer mortgage refinance loans, allowing borrowers to potentially improve their loan terms or access additional funds. With competitive interest rates and flexible repayment options, NCBA aims to accommodate the financial preferences of borrowers. Additionally, their construction loans cater to individuals or developers planning to build their dream homes. For more detailed information about NCBA Kenya mortgages, visit their official website, contact their mortgage department, or consult with an NCBA mortgage specialist.

3. Housing Finance Bank

Housing Finance Bank Kenya is a prominent provider of mortgage financing solutions, offering a wide range of options for individuals looking to purchase or refinance residential properties. With a focus on housing finance, the bank specializes in helping customers achieve their homeownership goals. Whether you’d like to purchase a house, apartment, or land for construction, Housing Finance Bank Kenya provides competitive mortgage products to suit your needs. They also offer mortgage refinancing for those looking to improve their loan terms or access additional funds. With flexible repayment options and attractive interest rates, Housing Finance Bank Kenya aims to make homeownership more accessible. To explore their mortgage offerings in detail, individuals can visit the bank’s official website, reach out to their mortgage department, or consult with a Housing Finance Bank Kenya mortgage specialist.

Other mortgage lenders in Kenya include:

• Kenya Commercial Bank (KCB)
• Cooperative Bank of Kenya
• Equity Bank
• Absa Bank Kenya (formerly Barclays Bank)
• National Bank of Kenya
• Stanbic Bank Kenya
• I&M Bank
• Family Bank

Conclusion

We have explored the different types of mortgages available, such as fixed-rate and variable-rate loans, and discussed their advantages and considerations. Additionally, we have highlighted the factors that lenders consider when assessing mortgage applications and the qualifications required for eligibility. Understanding the additional fees associated with mortgages, such as legal fees, stamp duty, and insurance, is crucial for borrowers to plan their finances effectively. Furthermore, we have provided an overview of some prominent mortgage lenders in Kenya. By familiarizing yourself with the information shared in this guide, you are now better equipped to navigate the mortgage process and make informed decisions when pursuing homeownership in Kenya. Remember to conduct further research, seek professional advice, and compare different mortgage options to find the best fit for your needs and financial circumstances.