On the face of it, the recent rates cap legislation is good news for borrowers because reduced interest rates will result in lower repayment instalments for loans. The good news is dependent on loans being granted in the first place, and as banks come to terms with the new laws and begin to figure out their impact on business, there is no doubt about one of the key outcomes – for most people, loans will be harder to secure.
The reasons for this are clear: Banks will focus on protecting profits, and to achieve this objective with a reduced income and profit margin it is clear that costs must be reduced. Consequently, there will be a wide-ranging efficiency drive within the banking industry during the next year or two, where staff will be expected to be more productive, salary growth will be slowed down and administrative and financial costs will be analysed and reduced.
One key financial cost is incurred from non-performing loans, where the borrower is unable to meet loan repayments and banks spend time and money following up on debts, appointing lawyers, and, as a last resort, trying to recover and resell assets. Since 2011, non-performing loans (loans more than three months in default) have been on the increase and they now account for more than Sh80 billion of borrowings, or 6 per cent of all loans.
As it is no longer possible to increase the spread rate between the cost of money to the banks and the cost of the loan to the borrower to offset the costs of non-performing loans, there will be a drive by the banks to reduce the incidence of default. This will be achieved by reducing loan to value ratios and through the introduction of stricter lending criteria for successful applicants.
Buying a house usually involves taking a loan, often from a bank or a similar financial institution. The budget, and therefore the house location, size and amenity will be determined by the sum of available funds plus the loan, which will be an amount that can be repaid comfortably from income. While the recent introduction of the loan interest cap might be good news for borrowers who meet the more stringent loan qualification criteria, it is bad news for those who do not because they are effectively blocked out from obtaining a mortgage.
This process reduces the pool of potential buyers, which in turn lowers the number of houses sold. Developers must, therefore, bring innovative financing schemes to the market to keep house sales moving.
Superior Homes, for instance, recently introduced a payment scheme called Buy Over the Long Term (Bolt). The buyer pays an agreed sum of money as a deposit and then makes regular payments to secure a house at Greenpark Estate in Athi River, with an entry date of two or three years in the future. The total cost of the house is fixed at the start of the agreement using a formula based on the amount of deposit and the payments.
Bolt is flexible and each purchase can be tailored to the buyer’s specific circumstances. Some buyers have no deposit while they can afford substantial monthly payments, others have seasonal incomes, while some may be planning to sell a property in the next year or two.
Bolt effectively by-passes the bank and all of the attendant costs, which reduces costs to borrowers. Such a product is also suitable for buyers who might not normally qualify for a loan. The introduction of such packages could help developers maintain a stream of customers despite the expected drop in mortgage buyers.