Prospective homeowners are set to enjoy cheaper borrowing costs as increased competition and cheap deposits push cash-flush mortgage providers to lower lending rates.
Barclays Bank of Kenya has become the latest to slash its mortgage rate to 11.99 per cent from 14 per cent, joining CFC Stanbic, Standard Chartered and Kenya Commercial Bank in a trend that is fast gaining prominence in the lending front.
This comes at a time when mortgage financiers – KCB Bank and Housing Finance – are in the middle of multi-billion shilling fundraising plans to allow them tap cheap money that will give them headroom to cut lending.
“Mortgage rates are coming down because of competition among commercial banks. They are also enjoying cheap source of financing from customer deposits,” Mr Frank Ireri, the managing director of Housing Finance, said on Wednesday.
The build-up of cash in local companies and the scarcity of investment opportunities gives bankers an upper hand in the management of costs in the deposit-taking market.
As a result, the deposit rate – the interest that banks pay customers for money left in their accounts for a specified period of time – has been declining as the short term government debt market gets saturated, leaving companies and high net worth individuals with loads of cash to keep in the bank.
Banking executives says that wholesale deposits have dropped to between six and seven per cent from a high between 10 and 11 per cent last year.
The drop in deposit rates has been the main driver of the ongoing aggressive cut in lending rates that is now spreading to the mortgage market.
Barclays bank’s reduced mortgage at 11.9 per cent will run till the end of September as it seeks to grow its mortgage business.
In April this year, KCB cuts its mortgage rate from 15 to 13.5 per cent, while Stanchart reintroduced its 10.9 per cent fixed mortgage offering.
“We were able to reduce our lending rates because we merged our operations with S&L, and this enhanced our capacity to offer cheaper and bigger mortgage loans,” said Mr Martin Oduor-Otieno the KCB chief executive, adding that the bank has room for further cuts.
The bank merged its mortgage subsidiary –Savings and Loans Ltd (S&L) –with the banking unit, to allow the home lending arm to tap into cheaper deposits and lend larger loans on the strength of the capital ratios.
Mr Richard Etemesi, the Stanchart CEO says that the bank was able to cut its lending rate mainly because of the low interest rate of a Sh2 billion loan it acquired from the parent company, SCB.
“Stanchart was able to reduce the mortgage rates because of the cheap loan acquired from our parent company,” said Mr Etemesi.
Housing Finance which claims 35 per cent market share, is also planning a rate cut once it receives the green light to begin mobilizing deposits through current accounts
Asked if they planned a lending rate cut, Mr Frank Ireri, the HF managing director said: “Not soon because we can only reduce when we have sufficient customer deposits to guarantee cheaper financing.”
Housing Finance currently offers mortgages at 12.5 per cent base mortgage rate and is gearing up for a Sh10 billion corporate bond next month as it positions itself for long term housing development projects.
The bond offer which is still awaiting regulatory approval has been on the cards since 2002 and is expected to raise HF’s capital level from the current Sh3.1 billion to Sh13.1 billion.
Through the bond, HF will have a war chest of long-term capital to allow it to expand its mortgage business and address the current mismatch exposure between short-term deposits and the long-term lending associated with provision of mortgage facilities.
“HF relies of more expensive sources of financing like long term loans making it difficult to stay at par with commercial banks,” Mr Ireri said.
Central Bank statistics however indicate that lending to the real estate sector has lagged behind borrowings by businesses and private households that have taken up 30 and 22.7 per cent of the private sector borrowing year to date.
Borrowers in the real estate sector have taken up 15.4 per cent of the Sh828.9 billions in loans extended to the private sector.