Buying a home can be a complicated process, and most people don’t know the ins and outs of how to make it happen. Figuring out what type of mortgage you should take out can be overwhelming. But in this article, you’ll find all the key points you need to keep in mind when applying for a mortgage.
Find out everything you need to know about mortgages, mortgage rates, and mortgage types so that you can take the next steps with confidence.
A mortgage is given by the bank or lender and paid back in a series of regular payments. The payments are divided into principal and interest.
- The principal is the amount you borrow to buy the property.
- Interest is what the lender charges you for borrowing the money.
The borrower goes to their preferred lender for the mortgage, and they must meet the set requirements. A mortgage applicant must have a good credit score and be able to raise the down payment. You can raise the down payment by saving money or selling other properties.
There are different types of mortgages that a borrower can access. Mortgages available include conventional fixed mortgage rates, adjustable mortgage rates, balloon mortgage rates, and reverse mortgage rates.
In Kenya, the most common types of mortgages are fixed and adjustable rate mortgages. Stay with us as we define each type of mortgage.
a traditional fixed-rate mortgage
A fixed mortgage rate has a set interest rate for the term of the mortgage. The interest is agreed upon before the closing and ranges up to 30 years. Mortgages with longer repayment periods have a higher overall cost than shorter periods. The repayments for a fixed-rate mortgage remain the same throughout the period.
With an adjustable-rate mortgage, the interest rates change from time to time. The adjustable rate depends on the market forces. An adjustable-rate mortgage is good if the fixed rate is higher and you don’t intend to hold the mortgage for long.
The adjustable rate depends on the following.
- Introductory interest rate:
- Introductory period length:
- The frequency with which interest rates change
- The index rate of the interest is tied to
- Percentage points the lender adds to the index
A balloon mortgage starts with a low payment rate and balloons as the mortgage nears its end. This type of mortgage is ideal for borrowers who expect a higher income towards the end of the mortgage tenure.
It is important to note that this kind of mortgage is not available in Kenyan markets.
A reverse mortgage allows older people to tap into the equity of their home. The lender gives you a monthly payment that is drawn from the equity of your home. Unlike a forward mortgage, with reverse mortgages, you owe the lender more as time elapses. This is not available in the Kenyan market.
How mortgages work
A mortgage enables you to own a home or a real estate property without paying the purchase price in advance. The lender gives you the money you need to buy a property. You will pay back the principal plus interest over a period of time. Lenders have the right to the property until the borrower completes paying the mortgage.
If the borrower fails to pay the mortgage payments, the lender will foreclose on the property. In simple terms, the lender will begin the selling process to recover their money.
The mortgage application process starts with the borrower expressing interest in getting the mortgage. A lender will need documents such as bank statements, KRA Pin, pay slip, and information on the property you intend to buy. They will also run a credit check to ensure your scores are in align.
Once the lender receives all the documents, the underwriting department will run rigorous checks to confirm whether you qualify for the mortgage. After the confirmation that the borrower qualifies for a mortgage, the lender gives what is called a pre-approval.
The pre-approval gives the buyer an upper hand as they are able to confirm to the seller, they have access to the money. They can negotiate better discounts once pre-approved.
After the lender and the borrower agree on the terms, they will meet at closing. During which the borrower makes a down payment and the lender then pays the seller. The seller will then sign the transfer documents.
Mortgage-related expenses and fees
When taking out a mortgage, there are several costs that you will incur. Some of the costs are directly related to the mortgage, while others relate to the property. In this section, we look at costs that form part of the mortgage.
The monthly or periodic payments you make will consist of these costs.
The lender charges you for the financing you need to secure the property.
This is the money you borrowed to buy the property. You pay back the principal plus interest.
- Mortgage insurance
Mortgage insurance is paid when the borrower does not pay a 20% down payment.
- Home insurance
Home insurance covers your home against damage from disasters such as fire and other accidents.
- Property tax
The lender collects any tax associated with your property as part of your monthly payments and puts the money in an escrow account. When the taxes are due, the lender withdraws the money from escrow to pay the taxes.
- Valuation fees
The mortgage provider will value the property you intend to buy to ensure it is worth the purchase price.
- Loan origination fees
The lender charges you for preparing and processing your documents. The loan origination fees cover document preparation, legal fees, and any other fees the lender incurs during document preparation. This is also known as facility fees.
- Title search fees
A title search is conducted to ensure the property belongs to the seller and there are no claims on it.
Lender title insurance
- Stamp duty
You will need to pay stamp duty after purchasing land to build your home.
- Legal fees
Legal fees are paid to the lender for the legal services offered.
Sample fees charged in Kenya
|Facility fees||1% of the loan amount|
|Exercise duty||20% of the facility fees|
|Mortgage protection fees cover||0.575% of the loan amount|
|Domestic insurance package||Annual fees of 0.125 of the value of the property|
|Valuation fees||Depends on property|
|Stamp duty||4% of the value of the land.|
|Legal fees||1% to 5% of the loan amount|
|Mortgage insurance||3% insurance premium to cover the extra 20% down payment in case of 100% financing.|
How much mortgage can I get approved for?
The mortgage amount you get approved for depends on several factors. A general rule is that you can finance a mortgage that is two and a half times your annual gross income. For instance, if you earn KSH 190,000 per month, which translates to KSH 2,280,000 per year. You can afford a mortgage of Ksh 5,700,000.
However, the amount of mortgage you get approved for does not solely depend on your income. The lender will evaluate your finances and decide how much to approve. These are the main factors that a lender considers.
Gross income is the amount a prospective borrower earns per month.
Mortgage income ratio (front end ratio)
This is the percentage of your income that will go towards the payment of the mortgage. A general rule is that the ratio should not exceed 28% of the gross income. However, some lenders exceed the ratio by up to 40%.
The debt-to-income ratio
The debt-to-income ratio calculates the percentage of your gross income that goes towards debt repayment. Debt includes credit cards, child support, and any other outstanding loans. The recommended debt-to-income ratio is 43%. Anything above that will have you missing out on that mortgage.
Your credit score shows how risky it is to lend to you. If you have a poor credit score, you may not be able to access credit facilities such as mortgages. If you plan to buy a home, work on your credit score.
Before a lender offers you the money you need to purchase a home, they consider your income, debt, assets, and liabilities. The lender will assess you to see if anything can jeopardize your ability to pay the mortgage. The income and monthly expenses determine the amount the lender will offer, while the credit history and score determine eligibility and the mortgage rate.
The documents you will require when applying for a mortgage
When applying for a home mortgage, you will need the following documents
- A duly filled application form (the bank will provide)
- Copy of National ID or Valid Kenyan Passport
- Copy of a Kenya Revenue Authority (KRA) Pin certificate
- Copy of Marriage Certificate or Affidavit single status
- Proof of residence (a copy of the current utility bill)
- Completed Mortgage Protection and/or domestic package insurance forms (provided by the bank)
- Letter from Employer: Date of engagement, designation, remuneration, terms of employment, retirement age
- 3 months certified recent pay slips
- 6 months’ certified recent bank statements where salary is paid into
Where are mortgage rates are going?
In 2022, mortgage rates have been going up to levels not seen even during the pandemic. An upward climb is expected throughout the year, mostly due to inflation. A general rule is that when inflation is low, mortgage rates tend to be low, while the opposite is true. High inflation results in a higher mortgage rate.
In Kenya, the central bank increased the interest rate by 50 basis points and set the base lending rate at 7.5%. This is the first increase since 2015. The increase in the rate was due to inflation, which has resulted in an increase in commodity prices, disruption of the supply chain due to the war in Ukraine, and heightened political activity.
How long does it take to get a mortgage approved?
The mortgage process has different parts, including preapproval, home appraisal, and fund disbursement. Most lenders approve a mortgage in one to twelve weeks’ time once all the documents are received. The time it takes a lender to process a loan differs, and it’s important to enquire from your preferred lender how long their process takes.
The top mortgage providers in Kenya
These are the top providers of mortgages in Kenya.
|Bank name||Interest rate||Financing offered||Amount to borrow||Mortgage fees (internal)||Mortgage fees (external)||Mortgage loan tenure|
|KCB group||11% p. a||90% for owner occupied.80% for income-generating properties.70% for plot purchase.||Borrow from Ksh 500,000||Appraisal fees at 2.5% of the loan amount.||Legal feesstamp duty (0.1 of the loan amount).valuation feesInsurance for life and property.||Up to 15 years|
|Standard chartered bank||11.9%||Construction mortgageHome mortgageNon-resident mortgage||Borrow up to Kes 100million||Facility fees at 1% of the loan||Legal fees Stamp dutyInsurance for life and propertyValuation fees||Up to 25 years|
|NCBA Bank||11.9%||Finance up to 105% of the value of the property. 70% plot financing||Facility fees at 1.5% of the loan amount.||Up to 15 years|
|Absa bank||14% p.a||Offers up to 90% financing||Transfer Stamp duty at 4 % of the home valueStamp duty on charge at 0.10%Negotiation fees at 1-2%Legal fees -1.20 %Fire insurance -0.13%Home insurance at 0.30%Valuation fees at 0.25 value of the property||Up to 15 years|
There you have it! Everything you need to know about taking out a mortgage to buy a home. We hope this article has been helpful in giving you the information and confidence you need to take this big step. Remember, buying a home is one of the biggest financial decisions you will make in your lifetime, so be sure to do your research and work with a trusted advisor to ensure it’s the right decision for you.