Friday, July 25, 2008

Borrowers face high home loans charges

Written by Morris Aron
Building under construction
July 25, 2008:
Mortgage players are likely to increase their interest rates should the liquidity crunch and rising inflation trends persist, market players have said.

Already, Commercial Bank of Africa has indicated that it will increase its base lending rates by 1.5 per cent from 14 per cent to 15.5 per cent as from August 1.

Some players in the market however maintained that, stiff competition in the home loans industry will delay such revision.

“Any financial institution — particularly mortgage lenders— contemplating revising interest rates will have to tread carefully lest they make a wrong move based on temporary economic situation,” said Beatrice Maingi, the general manager of Stanchart’s secured lending division.

But as the debate on which direction interest rates are bound to go, borrowers for home loans stand to suffer the most due to the structure of their loans, which are to be paid for more than 15 years compared to ordinary loans that last for between two to five years.

For example, if a bank raises by one per cent the interest rate on a mortgage loan of five million shillings— the average price of a middle income house in Nairobi — the borrower will be forced to pay an additional Sh50, 000 per year for the rest of the rest of the payment period, unless there is a downward revision of interest rates.

The head of marketing at CBA Chris Pasha said the increase in base lending rates will affect all products but the final pricing of mortgage loans will be determined at a later date.

Other financial institutions are reportedly waiting for this month’s inflation figures from Kenya National Bureau of Statistics to decide on the direction of interest rates.

Ms Maingi told the Business Daily that as the high inflation rate scenario unfolds and liquidity crunch continues unabated, financial institutions are keenly monitoring the situation with a possible reaction.

“The situation warrants a careful study of the market with a possible review of interest rates,” said Ms Maingi.

Commercial banks are sending strong signals that should the current economic conditions persist and begin to eat into bottom lines of companies, revision of interest rates may be inevitable.

Bankers say that mounting pressure for higher interest rates is the result of high inflation and liquidity crunch that has increased the cost of doing business.

John Wanyela of the Kenya Bankers Association recently told the Business Daily that the pressure is arising from inflation rates that are way above the Central Bank’s target — a clear signal that the prevailing economic conditions are beyond CBK’s control.

Official statistics indicate that the overall 12-month inflation stood at 23.9 per cent in May with the underlying inflation at 2.2 per cent above CBK’s benchmark of five per cent.

But even as inflation continues to bite, other players frown at the rush by some banks to increase interest rates.

Joram Kiarie, business manager at Savings and Loan—the mortgage subsidiary of Kenya Commercial Bank — said any increase in interest rates should be guided by much more market data and not merely inflation rates and liquidity crunches as such phenomenon are known to be temporary.

“Increasing interest rates on credit facilities should be looked at carefully because some products like mortgage loans are long term and their interest rates are arrived at based on a thorough analysis of market trends and a forecast in the long term,” said Mr Kiarie.

Building under construction
Mr Kiarie says that what the economy is experiencing is similar to the situation that prevailed three years ago after the KenGen IPO. This was a scenario where a few banks, that acted as receivers of the IPO, ended up holding too much money at the expense of the others. Mr Kiarie predicts that the crunch will ease off as Safaricom IPO refunds flow back into the mainstream economy.

In the same tune, CBK has sought to calm the nerves of commercial banks with a rider that there is no cause for worry as the situation is expected to ease off once money in possession of four commercial banks that received Safaricom IPO funds are channelled to the mainstream economy. So far, four billion shillings of the Safaricom refund has not reached investors.

CBK has also been quoted in the past saying that inflation rates in the economy could not be captured fully and that no intervention to address inflation will be carried out until the Safaricom IPO refund process is complete.

However, revelations that the refund process is almost complete with only four billion shillings remaining to be disbursed and that Treasury is holding Sh51 billion from the proceeds of the Safaricom IPO has thrown the liquidity crunch and high inflation debate into murky waters.

A section of market players argue that to ease the crunch, Treasury should release the money back - throw the planned budgetary spending - to the mainstream economy as a solution.

If mortgage financiers review their rates, Standard Chartered —one of the mortgage companies with a fixed rate mortgage (FRM) product— stands to win pricing wars but lose out on profit.

Under Stanchart’s fixed rate mortgage launched a couple of years ago, interest is charged on mortgage remains stable for five years even if underlying interest rates are revised upwards.

Most of other mortgage companies have adjustable rate mortgages (ARM), that are tweaked regularly to reflect movements in the market rates.

Mortgage financiers Housing Finance and S&L told Business Daily that they are not contemplating any increase of interest rates on their mortgage products.

Stanchart says, it may consider the move if the trend is left unchecked while other players like CFC Stanbic, I&M chose to remain silent on the matter. CBA however says that, the situation might be temporary, but even then, they have to respond to economic situations.

“We have raised our base lending rates, if the factors surrounding the liquidity crunch and high inflation rate eased then we will also reduce our interest rates,” said Pasha.

1 comment:

debt consolidation said...

There are so many home loans on the market these days with an increasing variety of rates, fees and features that it really pays to shop around. Thanks for the info!