By Ian Henderson
On the face of it, the recent rates cap legislation is good news for borrowers because reduced interest rates will result in lower repayment installments for loans.
The good news is dependent on loans being granted in the first place and, as banks come to terms with the new laws and begin to figure out their impact on business, there is no doubt about one of the key outcomes – for most of us loans will be harder to secure.
The reasons for this are clear. Banks will focus on protecting profits and to achieve this objective with a reduced income and margin it is clear that costs must be reduced.
I predict that there will be a wide ranging efficiency drive within the banking industry during the next year or two where staff will be expected to be more productive, salary growth will be slowed down and administrative and financial costs will be analysed and reduced.
One key financial cost is incurred from non-performing loans where the borrower is unable to meet loan repayments and banks spend time and money following up on debts, appointing lawyers, and, as a last resort, trying to recover and resell assets.
Since 2011 non-performing loans (loans more than 3 months in default) have been on the increase and they now account for more than Sh80billion of borrowings or 6 per cent of all loans.
As it is no longer possible to increase the spread rate between the cost of money to the banks and the cost of the loan to the borrower to offset the costs of non-performing loans, there will be a drive by the banks to reduce the incidence of default.
This will be achieved by reducing loan to value ratios and through the introduction of stricter lending criteria for successful applicants.
Buying a house usually involves taking a loan and often the loan will be from a bank or a similar financial institution.
The budget and therefore the house location, size and amenity will be determined by the sum of available funds plus the loan, which will be an amount of money that can be repaid comfortably from income.
While the recent introduction of the loan interest cap may be good news for borrowers who meet amore stringent loan qualification criteria, it is bad news for those who do not because they are effectively blocked off from obtaining a mortgage.
This process reduces the pool of potential buyers which in turn lowers the number of houses sold. Developers must therefore bring innovative financing schemes to the market in an effort to keep house sales moving.
Superior Homes has recently introduced a novel payment scheme called Buy Over the Long Term (BOLT). The buyer pays an agreed sum of money as a deposit and then regular payments to secure a house at Green park Estate with a date of entry some two or three years into the future.
The total cost of the house is fixed at the start of the agreement using a formula based on the amount of deposit and the payments.
BOLT is very flexible and each purchase can be tailored to the buyer’s own circumstances. Some buyers have no deposit while they can afford substantial monthly payments, others have seasonal incomes and some may be planning to sell a property in the next year or two.
BOLT effectively by-passes the bank and all of the attendant costs which reduces costs to borrowers. Such a product is also suitable for buyers who may not normally qualify for a loan.
Introduction of such packages could help developers maintain a stream of customers despite the expected drop in mortgage buyers.
The Writer is the Managing Director (MD) of Superior Homes Kenya
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