Innovation in finance, key to promoting home ownership

Home ownership remains a pipe dream for many Kenyans if official mortgage data is any guide.

The Central Bank of Kenya (CBK) Banking Supervision Report 2020 paints a bleak picture of homeownership levels. Kenya only has 26,971 mortgages in a country that has a working population of approximately 22.3 million.

It gets worse. CBK data shows that the number of mortgages fell by 1,022 mortgages or 3.7 percent due to fewer mortgage loans being advanced due to the Covid-19 pandemic and a high number of corporate layoffs.

Most Kenyans derive their income from the informal sectors, and according to the Kenya Revenue Authority database, three percent of those in formal employment earn more than sh 100,000. Therefore, most people cannot buy homes with cash or installments due to the astronomical cost of owning a home.

Despite numerous interventions to encourage homeownership, including changing retirement benefit rules that allow savers to use a portion of their savings to purchase property and removing fees such as stamp duty for homeowners first-timers, increasing the number of owners is proving to be an insurmountable task.

Now would be a good time for our policymakers at the Treasury to toy with the idea of ​​alternative forms of financing that can catalyze the journey from rental to homeownership.

One such alternative form of financing that is ideal for the Kenyan market is the shared ownership concept that is popular in markets like the UK.

Under this scheme, mostly first-time buyers buy a share in an apartment or house. It is aimed at buyers who cannot pay the full amount of the mortgage but can pay a portion, say 25 percent.

Shared ownership allows such buyers to purchase a 25 percent interest in the property where they will pay a monthly mortgage for their interest in addition to rent.

Over time, as a buyer’s income increases—for example, through promotions, higher-paying jobs, or additional income—they can top up and grow their shareholding up to 100 percent or full ownership through a process. called ‘ladder’.

The beauty of this model is that even if a buyer does not own an apartment or house out of its entirety, they will have an equity interest, unlike our current situation where a tenant can live in a unit for years, but unfortunately he will never have a stake in it. said property.

For lenders, this model is also ideal, as it will allow banks, savings and credit societies (saccos) and other institutions to lend to a market that would otherwise be excluded from the real estate market, as potential buyers they may not be able to meet the full amount of the mortgage or the required deposit.

Rent-to-own schemes are other alternatives to home ownership through lease-to-own contracts. Although these schemes have been around for some time, they need to be expanded.

There is good progress in this regard, as seen by the saccos who are teaming up with Kenya Mortgage Refinance Company to offer their members mortgages below current market rates.

Finally, another alternative financing solution that can boost homeownership is for the government to introduce a guaranteed purchase market for completed units that meet affordable housing criteria.

Such a move significantly reduces the market risk of developers and thus gives them the confidence to implement more projects. Ultimately, this would reduce project development costs which translate into affordable units.

These are just some of the alternatives that the Treasury should consider to encourage more Kenyans to work their way up the property ladder.