Syovata Ndambuki

In August, 2018, the Kenya Mortgage and Refinancing Company (KMRC) was established as a pillar of the Affordable Housing agenda. KMRC is a financial institution but unlike typical financial institutions like banks and SACCOs, the company does not take deposits from members. It works as a credit wholesaler, meaning it provides loans to primary lenders (banks and SACCOs) at an affordable interest rate of 5%.

The lenders are then required to avail these loans to borrowers at a single digit interest rate. Currently, the interest rate for KMRC loans stands at 9.5% annually. The refinancing company was formed to make homeownership more affordable, by providing cheaper home loans to borrowers building or buying properties categorized as affordable.

These loans are not available to everyone as there is a threshold borrowers are supposed to meet. In this article, we look at who qualifies for an affordable home loan, where to apply for one, the main differences between a regular home loan and a KMRC loan. We also use data from digital loan calculators to establish whether these single digit loans are significantly more affordable, compared to regular loans – when it comes to monthly repayments and the interest paid back.

What is a home loan?

A home loan, is a type of loan specifically designed to help you finance a property. The loan could finance either building or buying. A mortgage is a type of home loan specifically targeting borrower buying ready built houses or properties sold on off-plan arrangements. Typically, you borrow a large sum of money to buy a house, renovate one, or even build a new one and repay in monthly installments over a long period – could be 15 to 25 years.

Kenyan banks have offered home loans for a long time – way before KMRC loans were introduced. However, with changing economic environments and banking models, home loans have been inaccessible to low and middle income earners.

Challenges facing Kenyan home loan borrowers

One of the biggest challenges Kenyan face in financing a home loan is the possibility of changing interest rates. As the macroeconomic factors change, banks are allowed to revise interest rates over time. For instance, if you borrowed a loan 5 years ago when your interest rate of just 14% per year, chances are, it was revised to a higher rate as banks try to adjust to difficult economic situations such as inflation and high cost of doing business.

These revisions make home loans costlier and difficult for low income earners to afford, while increasing their vulnerability to auctions due to defaulting. High unemployment rates are also problematic as the majority of workers face the possibility of income loss along the way.

What is a KMRC single digit home loan?

The KMRC single digital loan was introduced to address several issues. First was the rising cost of credit. In 2024, banks offer different rates, depending on one’s creditworthiness. Some banks have rates as high as 20%, yet the affordable KMRC loan offers a fixed rate of 9.5% annually. A fixed rate means the interest rate will stay the same from the beginning of loan repayment period to the end. There are no surprise revisions or changes in your monthly repayments.

The affordable loans are also available to a select demographic of borrowers, thus reducing unfair competition. Ideally, these loans target low and middle income borrowers who earn Kshs, 200,000 and below, per month. In addition, the borrowers can only be financed for properties worth Kshs 10.5 million.

Aspiring homeowners looking to build or buy pricier properties cannot borrow this loan, which reduced the pool or borrowers significantly, making it more accessible to the targeted demographic.

KMRC recently formed a company known as the Kenya Mortgage Guarantee Trust to cushion low income earners by partially guaranteeing their loans. The Trust targets borrowers perceived as high risk and it is meant to improve trust between these borrowers and financial institutions, while boosting access to credit.

How to apply for the single digit loan

KMRC has partnered with about 20 banks and SACCO as the primary lenders. These partners receive applications and conduct appraisals to ensure the applicants qualify. You can ask your bank whether they offer KMRC loans. Alternatively, check KMRC website for listed partners. Different banks apply different in-house procedures in the appraisal process.

Housing, Finance, for instance, which is one of the partners requires a copy of ID or passport, KRA pin, three months’ pay slip, 6 months’ salary bank account statements and a letter from employer, for employed borrowers. Self-employed borrowers are required to submit a copy of ID or passport, KRA pin, one year bank statements and a business registration document.

For self-employed borrowers, it helps to also have your accounting books and transaction documents in order as proof of consistent income.

The actual cost of home loans

As expected, bank loans present other hidden charges beyond interest rates. These include, insurance, legal fees, stamp duty, commitment fees, excise duty fees and valuation fees. Using online loan calculators, we’re going to look at the cost of servicing a single digit, affordable home loan, vs a market rate home loan. Below, we have data from calculators by different banks to establish the average monthly repayment amount and the total interest paid over time.

Most digital calculators give a disclaimer when it comes to the accuracy of generated estimates given that each loan application is unique, depending on the borrower’s profile and other lending terms.

For this exercise, we’re working with a hypothetical property worth Kshs 5 million. Assuming that the borrower pays a 10% deposit out of pocket, the loan amount or principal amount borrowed should be Kshs 4.5 million to be repaid in 20 years.

The fixed interest rate for affordable KMRC loan given by multiple platforms was between 9% and 9.5%, as of April, 2024. For other types of loans, different banks provided different rates, ranging from 16% to 20.5% for the same loan amount of Ksh 4.5 million.

Monthly instalments and interest for affordable loans

Calculations for the affordable, single digit KMRC loan showed that a borrower would approximately pay Kshs 40,000 to 42,000 per month in monthly installments. This figure does not include insurance and taxes. When the cost of insuring the loan was factored in (in the case of one bank), the total monthly repayments shot up to Kshs, 47,400 from Kshs, 41,900.

The total amount (both the principal amount plus interest) paid back by the end of the 20 year payment period ranged between Kshs 9.7 million and Kshs 10 million depending on the bank, meaning the interest surpassed the principal amount borrowed. In any case, the interest was amount was roughly Kshs 5 million. Basically, if you borrow Ksh 4.5 million for a property, the total cost of that property will be two times what you borrowed, plus more.

Monthly instalments for regular home loans

Using the same principle amount of Kshs 4.5 million and a similar repayment period of 20 years, calculations for the monthly instalments for market rate home loans varied significantly from bank to bank.

As mentioned above, interest rates differ depending on the bank and the applicant. Note that currently, banks are using the Risk-Based Pricing model meaning each borrower is given a unique interest rate depending on their perceived risk. Your risk as a borrower is calculated according to your borrowing history, credit score and other factors.

Borrowers presenting high risk and higher chances of defaulting are offered less favourable loan terms and are likely to attract the highest interest rates.

In this case, estimates were generated using 20.5% as the highest interest rate and 16% as the lowest rate. The monthly instalments for regular home loans borrowed at 16% was roughly Kshs 62,000 across different banks, except one which had a slightly lower instalment amount of Kshs 57,600 per month. This figure does not include insurance and taxes.

For loans charged at 20.5% annual interest rate, the monthly repayment amount was roughly Kshs 78,000 without insurance. Adding insurance to the loan increased monthly instalments to more than Kshs 88,000.

The difference between affordable and regular home loans

Looking at these figures, it would be accurate to conclude that single digit affordable home loans are indeed significantly cheaper than regular home loans. The difference in monthly instalments between these two types of loans ranges between, Kshs 20,000 and 36,000, which makes a big difference.

However, extra charges associated with servicing both loans affect the cost of credit significantly. Different banks present different terms and it is always advisable to ask the right questions to establish all the extra costs. It is also wise to compare different banks for the best terms and rates.