Taking a mortgage in Kenya is the fastest way to sabotage your financial future. While mortgages in most developed countries are considered beneficial long-term debt, in Kenya, most mortgages have quite the opposite effect. Here’s why getting a mortgage in Kenya simply doesn’t add up.

Mortgages in the Western World.

 In the Western world, particularly in the U.S., mortgages are highly encouraged and often viewed as good long-term debt. This perspective is largely due to the relatively low average mortgage interest rate, which typically hovers around 6%. In contrast, the benchmark asset, the S&P 500, has delivered an average annual return of 10.5% from 1957 to 2023. Given this disparity, it makes financial sense for individuals to take out a mortgage rather than pay for a home entirely in cash. 

By leveraging a mortgage, homeowners can benefit from appreciating their property while keeping their cash invested in higher-yielding assets, making mortgages more affordable and strategically advantageous.

Mortgages in Kenya

In Kenya, the benchmark asset for investors is long-term Treasury bonds. They are the highest yielding, but I like to use them as the benchmark asset since our stock market has performed poorly.  Unlike the U.S., prevailing mortgage rates offered by banks are consistently higher than the returns on these bonds. This year, bond yields peaked at 18.5%, currently around 16%. In contrast, mortgage rates have skyrocketed to over 20%, largely due to rate hikes by the Central Bank of Kenya (CBK). 

As a result, it becomes illogical for any prudent investor to take on a mortgage when purchasing a home. cash is a more financially sound option. The incentive to avoid high-interest debt is clear with the average asset class yielding lower returns than the current mortgage rates.

It Gets Worse…

Mortgages are long-term debts typically with repayment periods ranging from 10 to 30 years. Most borrowers rely on their paychecks to service these loans, necessitating additional protective measures against the high interest associated with mortgages. Consequently, many people opt for mortgage insurance and job loss insurance. 

Mortgage insurance safeguards the borrower’s family in the event of death, critical illness, or disability, ensuring that the bank does not repossess the home. Meanwhile, job loss insurance provides a safety net for borrowers who may find themselves unable to meet monthly repayments due to unemployment. Thus, not only is the mortgage itself expensive, but it also incurs additional costs that further strain the borrower’s financial situation.

Exceptions 

Even though most mortgages in Kenya are not financially viable, there are a few notable exceptions.

1. Employer-Provided Mortgages: Some employers provide their employees with preferential mortgage rates ranging from 5% to 8%. These rates make sense and can genuinely qualify as good long-term debt.

2. Kenya Mortgage and Refinancing Company (KMRC): The Kenya Mortgage and Refinancing Company (KMRC), in partnership with certain SACCOs and banks, offers mortgages at single-digit interest rates, around 9%. The specifics of eligibility for these mortgages can vary, and it’s not always clear who qualifies for such advantageous terms.

3. Negotiated Preferential Rates: Some borrowers can negotiate lower mortgage rates with their banks based on their relationship with the bank, allowing for more favourable financing terms.

These outliers demonstrate that while most mortgages may be unwise, there are pathways to more favourable financing options in the Kenyan market.

Final Thoughts

Taking a mortgage in Kenya is a financial decision that requires careful consideration. Unlike in the Western world, where mortgages are seen as good long-term debt, the high interest rates and added costs in Kenya often make them less favourable. All in all, a mortgage in Kenya will only make sense under specific conditions:

1. Interest Rate: The repayment interest should not exceed 12%. It’s essential to consider potential rate hikes dictated by the Central Bank of Kenya (CBK) and what rates might look like in a high-interest environment.
2. Repayment Period: The duration of the repayment period is crucial. Generally, the higher the interest rate, the shorter the repayment period should be, and vice versa.
3. Monthly Repayments: Monthly repayments should not exceed 25% of your net income unless the mortgage is for commercial purposes. This guideline helps protect your income from being overly burdened by repayments.

Have you taken a mortgage in Kenya? How was your experience and do you think it was a sound decision considering your case? Leave a comment below. Also, check out my other articles on Kenyan Markets.