Mortgages in Kenya: Everything You Need to Know in Advance

EDITOR'S NOTE: This article is a part of the Money254 Partner series and is produced in partnership with Absa Bank Kenya to celebrate the March Mortgage Month. For more on Money254’s editorial policy, read here.  

Owning a house is a significant life milestone for most people, but the high costs can make it seem like an unattainable goal. 

And given the current increase in rent rates - a fourfold rise in the last 10 years, according to data by realtor HassConsult -  it might even be harder to save consistently to achieve this dream. Mortgages provide an alternative. 

Mortgages make homeownership a realistic aspiration for those who might otherwise have perceived it as a distant dream. And if you have been thinking about it, you understand taking out a mortgage is a significant life and financial decision. With so much money involved, you must understand the process before contacting a lender.

This article aims to help you with that. It will explore what a mortgage is, how to apply, and everything else you need to know in advance.

What is a Mortgage?

A mortgage is a loan borrowed from a financial institution such as a bank or Sacco to purchase real estate property. A mortgage loan is also known as a home loan. A mortgage loan can also be used to refinance a property. 

When obtaining a mortgage, a borrower secures a loan from a lending institution to fund the purchase of a real estate property such as a house. Throughout the loan's term, the property is collateral while the borrower repays the principal amount borrowed plus interest.

To qualify for a mortgage, you must meet specific eligibility requirements set by the financier. These requirements vary from lender to lender. Once approved, depending on the lender and the type of mortgage you want, you may need to pay an upfront fee known as a downpayment before the loan is disbursed.

The downpayment will give you home equity - that is, it allows you to own part of the house from the very beginning without paying the total amount. You will pay the remaining amount plus interest in monthly instalments over 5 to 30 years. Every payment you make will get you more equity until the last when the house becomes 100% yours. 

Note that it is possible to qualify for a 100% mortgage financing where you don't have to pay a downpayment. For example, with Absa Home Loans, you can get up to 100% financing for loans below Ksh10 million and 100% financing for an Absa Construction Loan if you already have a plot with a title deed in your name.  

Mortgages can be categorised into two depending on whether the interest is fixed for the duration of the loan or variable. 

Fixed Rate Mortgage - This mortgage loan has a fixed interest rate. You will pay the same interest throughout the loan's duration. The lender will offer you the loan at current interest rates. 

Adjustable/Variable Rate Mortgage - This mortgage loan has a changing interest rate. Throughout the loan's duration, the interest you pay may fluctuate (up or down) based on the prevailing market rates. These rates are regulated by the Central Bank of Kenya (CBK). 

Types of Home Loans in Kenya

There are four main types of home loans in Kenya, depending on your need: 

• Buying a Ready House: This type of mortgage involves taking a loan to buy a constructed house. The ready house can be a standalone family home or an apartment.
• Construction Loan: This type of mortgage allows you to borrow to buy land and build on it or build a house if you already own land. 
• Buy to Let: This type of loan allows you to borrow funds and buy a building for commercial purposes. It enables you to build a property investment portfolio by purchasing property to let.
• Mortgage Refinance: This is a type of loan where you essentially trade in your current mortgage for a newer one which may have newer, typically better terms. The old mortgage is paid off completely and you start repaying the new one with the negotiated terms you sought when applying for refinancing. 

What to Look for When Getting a Mortgage in Kenya

It's essential to understand the key features of a mortgage before taking on such a significant financial commitment. Mortgages are different from other types of secured loans. When you take a mortgage, the house is used as collateral even though you haven’t paid the full price. 

Additionally, the lender will keep the title deed and other documentation for the property. You must pay all the monthly instalments on time until you fully repay the loan. Once done, the lender will authorise the discharge of the property to your sole ownership.

NB: Some lenders will allow you to repay the loan as a lump sum before the end of the repayment term. This might come with charges depending on your initial agreements. Make sure to know what your options are in case you want to repay early before signing the mortgage loan agreement. 

So what happens when you miss a payment? 

If you miss a mortgage payment, a lender will typically penalise you, and you might be charged a late payment fee. If you miss multiple payments, a lender can repossess your house and force you to meet your obligations. 

If you fail to do this, you might lose your home. Each lender has a detailed process of dealing with late payments and delinquency (default) which you must discuss and understand fully prior to entering into an agreement. 

What are the Costs Associated with Mortgages?

All the costs that make up a mortgage can be categorised into three groups.

Mortgage Deposit: This is the upfront cost you need before starting your mortgage process. They include down payment and closing costs (negotiations, appraisal, legal, real estate agent fees, and taxes).

Learn More: Saving For a Mortgage Deposit? Everything You Should Know In Advance

On-going Costs: This refers to the money you'll continually pay during the loan. They include insurance and land rate taxes. 

Loan Amount and Interest: The loan amount is the total amount you will get or the amount you borrowed. Banks will approve different amounts for different borrowers depending on their risk profile. For instance, Absa Bank can offer up to 90% financing through the Absa Straight Purchase Mortgage if you want to buy a ready house. Interest is the cost of the loan.

How to Choose a Lender 

With many banks and financial institutions offering mortgages, how should you choose a lender? You can compare lenders based on different factors, including:

The Lender's Requirements: A lender will usually have minimum requirements (e.g., your Debt-to-Income ratio, income, etc.) you must meet before they start your mortgage application process. When shopping for a lender, you must ensure that you meet those requirements and that they align with your needs.

Approval Time: How long will it take the bank to get back to you, and how long will they approve you for a loan? The process will take a few weeks to a few months. A lender will typically give you a date after your first meeting.

Disbursement Time and Amount: It is important to note that there is no guarantee you will get what you were approved for, and that approval doesn't equal disbursement. After you have been approved, it will usually take time (a few months) for the loan to be disbursed. 

Cost: This will probably be one of the biggest considerations. You have to consider all the costs including estimated monthly repayments, down payment requirements etc. to make sure they align with your financial position. 

Percentage Financed: The higher the percentage of the house costs that a lender can finance, the lower the downpayment you will have to raise, but also, the more is the interest you will pay at the end of the loan tenure. You want to take some time and consider what makes the most sense for you.

Flexibility: While many things in a mortgage application will not really be up for negotiation, you may want to explore the possibility of qualifying for a variable interest rate, low to no early repayment charges and so on to make sure you get the best deal that may align with your future needs. 

Case Study: Absa Home Loans

To help you understand the various types of home loans available in Kenya, we will explore the mortgage products that Absa Kenya offers. Before applying for a mortgage, it’s essential that you familiarise yourself with the different options available to you and understand your needs. 

How to Apply for Absa Home Loans

The fastest way to apply for an Absa Home Loan is through the Absa Bank website. You start by filling out an application form where you provide basic details such as your name, contact details, and the type of home loan you want. This process is open for both existing Absa customers and new ones.

After you have filled out the form, Absa will contact you to offer more information, match you with a mortgage officer, and kickstart your application process. You can get a response on your mortgage application in just 48 hours and start planning.

If you prefer face-to-face interaction, you can visit a branch near you to apply for a mortgage. The Absa team will assess your eligibility, inform you of your requirements, and help track your loan application. 

Who is eligible for an Absa Home Loan? 

• Salaried individuals 
• Self-employed professionals 
• Self-employed business people

What are the Requirements for Absa Home Loans?

Home loans have varying eligibility criteria and requirements, including credit score, income, debt-to-income ratio, down payment amount, and property type. These factors affect the interest rate, loan amount, and mortgage terms. Different home loans have different requirements.

Here is a breakdown of Absa Home Loan requirements for salaried customers and self-employed professionals:

Types of Absa Home Loans

Absa offers a range of home loans to help customers achieve their homeownership goals, with personalised solutions for buying, constructing, and releasing equity. The bank has a team of experts to guide customers through the process and offer support at every step. 

Here’s a breakdown of the range of Absa Home Loans;

1. Affordable Housing

Absa has partnered with KMRC (Kenya Mortgage Refinancing Corporation) to offer affordable housing to first-time homeowners. This mortgage plan allows you to purchase or construct a house with a maximum market selling price of Ksh10,000,000.

Features:

• Maximum Loan Amount: 8M
• Maximum loan finance of up to 100%
• Interest rate 9.5%
• Repayment period of up to 25 years with Fixed mortgage rate for the first 9 Years.
• Offered to both salaried and Business customers
• Available for construction and straight purchase of residential properties only

2. Straight Purchase Mortgage 

This home loan offer is designed for individuals interested in purchasing a pre-built residential property. The loan is available in Kenyan shillings and US dollars, giving customers flexibility in borrowing options. The loan amount is specifically tailored for homes valued above Ksh8 million.

Features

Loans in KES

• Maximum Loan Amount: Subject to Affordability
• Maximum loan finance of 90%
• Repayment period of up to 25 years
• Maximum Income-to-loan Ratio: Up to 67%

Loans in USD, GBP, and EUR  

• Maximum Loan Amount: Subject to Affordability
• Maximum loan finance of 80%
• Repayment period of up to 15 years
• Maximum Income-to-Loan Ratio: Up to 50% 

3. Construction Financing 

This loan facility is intended for anyone who wants to build a home from scratch.

Features:

• Maximum Loan Amount: Subject to Affordability
• Get up to 100% of the construction costs if the plot is already owned. *This is subject to the value of the land.
• Get up to 70% for buying land and building
• Repayment period of up to 20 years
• Maximum Income-to-loan Ratio: Up to 67% 

4. Equity Release Mortgage 

This loan is intended for anyone who wants to top up on an existing mortgage or use unencumbered property (not charged to any bank/ no caveat on the property).

Features:

Loans in KES

• Maximum Loan Amount: Subject to Affordability
• Maximum loan finance of 80% of property value
• Repayment period of up to 15 years
• Maximum Income-to-loan Ratio: Up to 67%
• Security charge over the property

Loans in USD, GBP, and EUR

• Maximum Loan Amount: Subject to Affordability
• Maximum loan finance of 70% of property value
• Repayment period of up to 15 years
• Maximum Income-to-loan Ratio: Up to 50% 

5. Re-Mortgage

This facility is Intended for anyone who wants to transfer their existing mortgage to Absa Bank.

Features

Loans in KES

• Maximum Loan Amount: Subject to Affordability
• Maximum loan finance of 90%
• Repayment period of up to 25 years
• Maximum Income-to-loan Ratio: Up to 67%

Loans in USD, GBP, and EUR 

• Maximum Loan Amount: Subject to Affordability
• Maximum loan finance of 80%
• Repayment period of up to 15 years
• Maximum Income-to-loan Ratio: Up to 50% 

Absa Home Loan Costs

Absa offers a fixed interest rate of 9.5% on home loans below Ksh8 million for the first nine years and is intended for affordable housing for first-time homeowners. 

After the initial nine-year period, the interest rate reverts to the prevailing market rate. However, most loans are likely to be cleared within the fixed term since the Weighted Average Life (WAL) of mortgages, according to Absa Bank, is 8 to 9 years. 

For home loans worth Ksh8 million and above, the interest rate can be as low as 12.75% p.a., depending on the loan amount and other factors.

You should note that apart from interest, you will also pay other third-party fees collectively known as “closing fees.” Here is a chart displaying those additional charges in detail.

What to Consider When Taking a Mortgage 

Before taking a mortgage, you must consider your personal financial situation. Mortgages are long-term debt. When utilised well, they can allow you to own a house and avoid paying rent. However, when you rush to them, they can lead to bigger financial troubles, including instability due to loan burden. 

With that in mind, here's a checklist to help you understand if a mortgage fits you.

How much do you have in the down payment? - Before applying for a mortgage, it is vital to set a house price budget and start saving for a down payment. A lender might offer up to 100% financing depending on the home price, but that doesn't always mean it's a better deal. Sometimes, a larger down payment can work to your advantage. The more cash you pay upfront, the more likely you will get approved and get better terms - but this will differ from lender to lender.

How Stable is your income? - A lender may request to see your payslips and audited accounts before they approve you for a mortgage. To that end, you must have a stable income before you start the process. Additionally, income stability will help you gauge your ability to repay the loan quickly and avoid default.

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Existing Debt: Do you have any debts you are servicing? Debts can increase your DTI and hurt your chances of getting approved. Before applying for a mortgage, consider paying off your debt and keeping it below lenders' maximum DTI requirements. You should also factor in any informal debts that might not appear on your credit report and their eventual effect on your ability to repay.

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Your Creditworthiness: Lenders will typically require you to have a good credit history to qualify you for a mortgage or at the very least, to qualify for favourable terms. Before you apply for one, consider getting your credit report from one of the three licensed CRBs in Kenya and fixing any discrepancies that can affect your approval chances. 

The Location You Want: When it comes to mortgages, location is everything. It will decide the type of mortgage you get, how much you are approved for, and the repayment term. For instance, Absa Straight Purchase Mortgage is available for urban and upcountry locations, but construction loan is limited to urban areas only.

Should You Take a Mortgage?  

Is mortgage the right fit for you? You will need to weigh the pros against the cons.

Advantages of Mortgages

1. Good debt - Mortgages help you build equity which increases your net worth. 
2. Mortgages offer an easier route to homeownership as you only need to raise a portion of the house's value. Some options even allow for 100% financing. 
3. Tax relief of up to Ksh300,000 p.a. on the interest you pay. This can allow you to lower the total mortgage costs and reduce the pressure on your paycheque/income. 
4. Lower monthly repayments - The longer the repayment period, the less likely you are to spend servicing the loan on a monthly basis. You could essentially end up paying a sum equivalent to your monthly rent depending on the loan amount you borrow. This can, however, increase the long-term cost of your loan - in terms of the total interest you will pay. But it also frees up cash to invest in other areas. 
5. Different options to choose from depending on your unique needs.

Disadvantages of Mortgages 

1. Secured loan - the risk of losing your house if you default on the loan is always there. You need to plan very carefully and especially consider at length your ability to repay, on time, for the entire duration of the loan. 
2. High fees, including interest and closing fees, might result in buying a house for well above its market price.
3. Debt burden - mortgages take time to pay off, which can be stressful