Unlocking affordable housing in Kenya with a new era of mortgage solutions
Kenya’s home construction industry has evolved rapidly, bringing in new players to fill the void of providing long-term funds, helping to realize the dream of homeownership for many Kenyans. Simultaneously, under the Affordable Housing Agenda, the government has emerged as a key player, facilitating land provision and mobilizing funds for mass housing development projects.
Lenders have been entrusted with overseeing the disbursement of mortgages to prospective homeowners under this government-led scheme. This effort is being carried out through the Kenya Mortgage Refinance Company (KMRC), which has provided new avenues to develop single-digit interest mortgage solutions, with the goal of making affordable home loans accessible to more people.
Single-digit interest mortgages
The push for longer-term, single-digit interest mortgages has also led to the emergence of new mortgage options, such as tenant purchase, rent-to-own schemes, outright purchase, and borrow-to-build models, also known as construction loans.
Furthermore, in order to simplify the homeownership journey, lenders have streamlined the process of applying for home construction loans, from identifying suitable land to managing the construction process, covering everything from start to finish.
Construction loans are tailored to meet the specific needs of landowners who aspire to build their dream homes. Unlike traditional loans, these funds are disbursed based on the advice of building professionals who oversee the project, including architects and quantity surveyors, with payments made in stages corresponding to different construction phases. This approach expedites the transition from tenant to homeowner while mitigating potential financial risks.
This means that the role of a lender today has expanded to include non-financial services, such as conducting due diligence during land purchases and ensuring compliance with building laws and contractors to guarantee quality assurance practices throughout the property development process, from start to finish.
Construction approvals
To accomplish this, lenders hire professionals to inspect the properties at each stage of construction before releasing payments, ensuring that the work is of high quality and completed on time. Every lender is responsible for ensuring that stage valuations are completed throughout the construction process.
This ensures that borrowers receive what they paid for, on time, in good quality, and as agreed upon in the contract. It also ensures that the project’s value increases over time and that it has all the necessary certificates required by law, such as land ownership papers, construction approvals, and occupation certificates, upon project completion.
For example, Absa Bank requires prospective homeowners to provide an architect’s certificate as well as a relationship manager’s report before disbursing the first 25 percent of the applied loan amount. This includes official confirmation that the building plans have been approved and that the Bill of Quantities (BQs) has been prepared by an independent and qualified quantity surveyor.
This marks a departure from past practices, where loan disbursements heavily relied on the relationship between the borrower and the lender. In those times, the lender’s role was primarily limited to loan processing and disbursement, leaving the borrower to handle the purchase of construction land, obtain approvals, and proceed with the construction independently.
Read also: How Absa Bank is empowering Kenyans through digital savings
Make a down payment
As a result, more people can now obtain construction loans by simply pledging the land on which the new house will be built as collateral. This allows low and middle-income earners to secure mortgages without having to make a down payment. For instance, Absa Kenya offers construction loans ranging from 100 percent financing for construction costs on owned plots to 80 percent financing with a maximum 20-year payback period and a 9-month moratorium during construction, followed by interest payments on drawn amounts.
In conclusion, it is critical to emphasize that successfully navigating the construction loan route to homeownership requires careful consideration and planning. It begins with researching financial institutions that offer the best construction loan rates and terms.
It is also essential to work with reputable professionals to ensure the efficient implementation of the construction project in compliance with necessary regulatory requirements. With the right guidance and support, the journey from landowner to proud homeowner can indeed be accelerated, narrowing the homeownership gap in Kenya.
The writer, John Kaburu, is the Head of Mortgages at Absa Bank Kenya. Email: [email protected]
