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A mortgage is a long term loan usually taken to purchase property or land. It is therefore a debt instrument usually secured by a collateral in form of a specified real estate property in which the borrower is required to repay with a pre-determined set of payments. They are usually used by persons or businesses institutions to make large real estate purchases without having to pay the entire sum value of the property upfront. Over a period of years, the borrower pays back the borrowed amount plus the interest accrued until they eventually own the property upon completion of payments. It may also be used by existing property owners to raise funds. It is important to note that the borrower still owns the property even before completion of repayment however, in case the borrower defaults the lender can foreclose. Mortgages may also be referred to as “claims on property” or “liens against property”.
Typically, the property being purchased which is the house or land is pledged by the borrower to the lender. The lender therefore has a claim on the property should the borrower default on repayments. Therefore in the case of foreclosure, the lender can sell the property and clear the mortgage debt from the income generated.


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There are two types of mortgage markets;
Primary Mortgage Market
Secondary Mortgage Market
The Primary Mortgage Market is where the mortgage originator and the mortgagee meet and negotiate the terms in order to create a mortgage loan. Here the mortgagor and mortgagee initiate the contract so that the mortgagee acquires the funds to purchase the property.

The Secondary Mortgage Market allows the mortgage originator to recover the lent funds by approaching outside investors. The mortgage originator is able to sell the mortgage loan to mortgage aggregators. These are individuals or businesses that buy mortgages and securitizes them into Mortgage Backed Securities (MBS).


Fixed rate mortgage loans offer the same (constant) rate of interest over the repayment period. Due to this, the interest and principal payments vary however the overall payments remain the same. They therefore offer rate and payment security which makes budgeting easier. The fixed rate makes it difficult for individuals to qualify for mortgage loans because the payments are more expensive.

The rate and payments remain constant regardless of what happens to the economy.

The constant rates creates stability which makes budgeting easier. Therefore individuals can manage their funds with a great degree of certainty because mortgage payments don’t change.

They are simple to understand and thus are ideal for non-finance professionals or first time buyer.

They can tend to be too expensive for some borrowers since there are no rate breaks.

Qualifying for Fixed Rate Mortgage Loans is difficult when the interest rates are high because the payments are less affordable.

Adjustable rate mortgage loans have an interest rate that varies over time. The initial rate is usually below the market rate but then changes due to reasons the lender has no control over. If held long enough, the rate for the ARM’s usually surpasses the going rate for the fixed rate mortgage loans. They are usually suitable for individuals who prefer low payments in the short term. In cases where the interest rates are expected to fall, an ARM enables you to enjoy reduced rates without refinancing. However, they make budgeting difficult and possess a great deal of uncertainty.

They offer lower interest rates and repayments early on the loan term. Therefore the lenders are able to take larger mortgages they otherwise couldn’t since the lenders can use the lower payments when qualifying borrowers
They avail a less costly method for borrowers who don’t plan to live in one place for a very long time and therefore don’t need to buy a house.

It enables the borrowers to save and invest more and can use the earnings to help offset the balance.

The interest rates and thus payments can rise steeply over the term of the loan. This may end up being unbearable for the borrower.

The ARMs are complicated and hence difficult to understand. They also offer lenders more flexibility in matters of determining caps, margins and adjustment indices. Therefore unknowing borrowers may be easily confused or exploited by lenders.

In the case of negative amortization loans, borrowers may end up with an increasing balance with each payment. This is because repayments on the mortgage are set too low that they only cover the interest due with the remainder being added to the principal amount balance.


So you’ll have to choose between a fixed and adjustable-rate type of mortgage, as explained in the previous section. But there are other choices as well. You’ll also have to decide whether you want to use a government-insured home loan, or a conventional “regular” type of loan. The differences between these two mortgage types are covered below.

A conventional home loan is one that is not insured or guaranteed by the federal government in any way. This distinguishes it from the government-backed mortgage types
A primary mortgage institution is usually a bank, either commercial or a savings and loan. It may be local, privately owned, state-owned or a corporation. It does not matter if the bank is one out of many in a chain or a small family operation with just one branch. The primary mortgage institution is the direct lender of the money that the potential homeowner uses to purchase a house or other property, paying the mortgage back in monthly payments to the issuing institution
A large percentage of newly originated mortgages are sold by their originators into the secondary market, where they are bought by the secondary institution then packaged into mortgage-backed securities and sold to investors such as pension funds, insurance companies
1) Types of loans provided
Mortgage institutions only provide housing-related loans like home loans, loans against property and construction loans while Banks provide different types of loans like personal loans, auto loans as well as home loans. Mortgage institutions also offer long-term loans which are to be fully repaid after a very lengthy period compared to other institutions like SACCO’s that offer also short term loans.

2) Where do they get their funds?
Both Mortgage institutions and banks need to generate a pool of funds before they can start disbursing loans to customers. Banks lend loans by using the money deposited in Current and Savings Account (CASA) by their customers. The same money that you deposit in your Current/Savings account is disbursed by the Bank as a loan. This is profitable for Banks because the interest they pay customers on CASA deposits is lower than the interest they receive on loans. Housing Finance Companies do not have access to CASA funds and therefore generate funds through different ways. Reputed HFCs raise funds from the public as well as by borrowing from banks. Smaller Housing Finance Companies mainly rely on borrowing money from banks. Because they use money borrowed from banks, the cost of generating funds is higher for HFCs than banks. This is one of the reasons why HFCs charge a higher rate of interest.

3) Difference in payback period
Payback period is the amount of time required to have paid back the full amount of the loan borrowed. Most banks offer a payback period of as little as 12 months up to close to 5 years while mortgage institutions offer up to about 50 years to repay the loan.

In Kenya, there are mortgages of two types; fixed rate and variable/adjustable rate mortgages.

Some of the factors that influence the type of mortgage includes:
Interest – this is what banks gain from the loan from the repayments made. Interest may be fixed over the life of the loan or it may be variable, changing at certain predetermined periods. It may rise or it may fall, depending on existing market conditions.

Prepaid amounts – some lenders will limit or restrict prepayment of part or the entire loan. If the borrower decides to prepay, then he may also pay a penalty to the lender for the prepayment.

Amount and frequency of payment – in some cases, lenders may offer the borrower an option to increase or decrease the amount paid, without incurring penalties. The amount paid per period is variable.

Period of the loan – this refers to the time period the loan is lent out for. The borrower may be required to pay the entire amount after that lapsed time period. He may also be required to pay a certain amount at the end of some predetermined period.

Some of the loans offered by lenders includes:
The Owner Occupied Residential mortgage: This is offered to buyers intending to purchase a house to live in. The mortgage is popular among most borrowers, and lenders may lend up to 90% of the total cost of the property. CFC bank is offering up to a 100% of the home’s value.

Investment Residential: This refers to the situation where the borrower intends for the property as an investment and not as their primary home.

Construction Loan: This type of mortgage is directed towards construction of property. The lender may require that the project is overseen by professionals, like architects, engineers, and so forth. The lender normally disburses the money on an arrears basis to the contractor or person contracted to build.

Top up loans and/or equity release: The lender loans out money on the value of the property. Repaying the mortgage allows one to gain equity in that property. This equity can be availed to the borrower as equity release or top up.

Most Mortgage Institutions in Kenya are the banks; Equity Bank, NIC Bank, KCB, Barclays Bank. The best mortgage institution is the HF Group also known as Housing Finance Group which has been providing mortgage solutions for the Kenyan market for over 50 years. They have been market leaders in the housing industry in Kenya helping in the provision of one of life’s main basic need – Shelter. At Housing Finance, they pride themselves in being the premier property finance institution in the country, with a variety of products that suit your needs whether employed or in business. Others like the NIC Bank provide loans to both Kenyan citizens and non-Kenyan permanent residents.
Shelter is a basic human need and thus the Universal Human Rights Declaration identifies the right to proper housing as an integral part of the right to adequate housing. The housing policy in Kenya is derived from a variety of formal documents such as statutes, written policies and international accords. The Kenyan Constitution provides that every Kenyan is entitled to access of adequate and reasonable housing. In view of this, the Kenyan National Housing policy was initially comprehensively drafted in 1966/67 but later revised in 2004 in order to address the shortage in supply of housing particularly in urban areas. However, formulation of the country’s housing policy began in 1953.

The policy aims at the following:
Establishment of a National Housing Corporation- this corporation was established in 1953 by an act of parliament with the principal role of implementing the Government’s Housing policies and programmes. The board works hand in hand with the Local Governments and the general public in providing decent and affordable houses through various initiatives such as the Tenant Purchase etc.
Establishment of a National Housing Development fund- the fund is financed through the government’s budgetary allocations and is aimed at providing the capital for the initiation of housing projects. Additional finances are availed into the fund as financial support from partners who could be members of the public as well as NGO’s.

Facilitate inclusive participation of the formal and informal private sector so as to boost the investments in the production of housing developments for middle and low income earners. The government aims at providing an enabling environment for the private sector to mobilize resources to facilitate increased investments in housing.
Encouraging and facilitating research on development of cost friendly building materials and construction techniques in order to lower the cost of housing.

To promote the mitigation of poverty by employing the poor in projects in areas such as production of building materials and construction processes.

To develop and upgrade infrastructure in both rural and urban areas necessary for healthy living and improvement of human settlements. Improvement of rural infrastructure is also aimed at mitigating rural-urban migration.

Encouraging the development of housing units that are safe, aesthetic and environment friendly. It also aims at ensuring that the housing units have met the required safety standards and are therefore suitable for inhabitance.

To safeguard the human settlement environment from pollution destruction and degradation in so as to ensure safety and sustainable developments.

Streamlining and harmonizing existing laws to promote housing development. This includes amending existing urban laws, to ease up development.


Shelter being a basic human need. The struggle of acquisition of this necessity has become more difficult as the population of man has kept on increasing. It has therefore made it important for the government as well as the private sector to strive to ensure that every person has access to affordable, safe and sustainable housing.

The high levels of poverty among individuals has rendered access to decent housing an impossible dream to a considerable chunk of the country’s population. This cannot be overlooked as economic and social development is a collective process that involves everyone.

In addition, well planned and affordable infrastructure and housing, affords dignity and privacy to individuals, families and the community, which is a human right.
Adequate safe and affordable housing is also a deterrent to social unrest. This is usually evident in the frustrations and depravity of individuals residing in slums due to poor standards of living.

Affordable housing creation is both a direct and indirect investment in the National fight against poverty through employment creation. Cheap housing also enables individuals to save on their income making it available for other human needs.

Overcrowding of individuals is a catalyst for disease outbreaks which may lead to epidemics and national disasters. In addition, overcrowding and development of slums impedes on the environment’s aesthetic nature leaving a sore sight. This necessitates the government and other players to provide planned housing to combat this problem.

Institutional housing for public servants necessitates the government to provide housing for them. With a number of public servants such as police officers, chiefs etc. subject to occasional transfers it is prudent for the government to provide housing for their officials.

Even though the Kenyan mortgage market has been experiencing a positive annual growth rate of 34% according to the CBK`s report, it’s worth noting that the mortgage country’s market is relatively small according to the international standards. This can be attributed to the following factors:
Difficulties in land registration and titling- the country’s land registration system which was passed down from the colonial period was poorly adopted into our own needs on the ground. Lack of common ground between legal and customary systems has resulted in conflict and legal uncertainty. Registration of title deeds is time consuming and costly. This process is also affected by fraud with a lot of fake title deeds in circulation. This ties the developers’ hands making them unable to any carry out any form of construction on the land. Thus it creates a shortage of products for mortgage institutions. Thus the mortgage intuitions cannot meet the housing demand.

Low levels of income among the population- an efficient mortgage financing economy requires that the household’s earnings be sufficient above, regular and verifiable. However this is hardly the case for a considerable part of the Kenyan population. The insufficiency of their income cannot allow them to pay for mortgages and other living expenses concurrently. Similarly the inability to verify the income of some part of the population due to them subsisting on informal income proves a challenge to the mortgage institutions when trying to verify the household income. This provides the lender with much more work thus reflects to higher loan costs. This in overall makes the products by the mortgage institutions unaffordable and unmanageable, thus the people prefer to live in rental houses or slums.

Credit risk- with a great deal of the population living off the informal sector, it is difficult for the mortgage institutions to determine whether their income is sufficient and consistent. Similarly, lack of adequate credit histories makes the mortgage institutions coy on lending to individuals with fear of default.
High interest rates- with the CBK having lowered the standard base rate to 8.53% from 9.13% the mortgage rates now range from 10.9% to 18%. However, this is still quite high compared to international standards with some countries in Europe offering as low as 1.75 %( Switzerland). These relatively high rates act as a turn off to many people with the fear that they may end paying almost twice the fair price of the property.

Inadequate funding- with majority of mortgage activities in the country being undertaken by the banking sector, lack of long term funding is a major concern. Banks cannot rely on deposits to provide long term funding as they are usually relatively uncertain and are considered to be short term liabilities. Even though they can be viewed also as long term financing, the bank customers are able withdraw their deposits at their wish. Similarly most of the country’s property developers are family owned businesses who lack adequate financing to undertake large projects which results in inadequate supply of mortgage products.

Other land issues- the lack of land in favorable area impacts on the willingness of individuals to acquire property. Most property is being developed in remote areas which are quite far from town and have shortage of amenities such as water, poor roads etc.
Reconciling legal and customary land laws- it’s important for the government through the Ministry of Land, to work out ways of streamlining land acquisition processes. This should include issuance of title deeds to ensure there are no qualms I trying to figure out the true property owners which will in turn ease the process of purchase and transfer of land for project development. The review of the land registration system will reduce the corruption involved in such matters which will ultimately lower the cost of property.

Developing a wider variety of products- it’s necessary for real estate developers to come up with a wider scope of products to cover the highly diversified population. Developing cheaper products will open doors for those on the lower spectrum of income to be able to acquire mortgages and be able to pay back the mortgage while still being able to meet their living expenses.
The Credit Reference Bureau should expand their data collection- the Credit Reference Bureau should work hand in hand with lenders with to collect loan data. In addition, they should expand their coverage by pushing lender to provide all their loan data. They can also expand their data collection sources from commercial banks, Microfinance institutions and HELB to cover also Savings and Credit Co-operatives (Saccos), and users of utility services such as water and electricity. Having a wider coverage would enable much more accurate credit ratings which will reduce the effect of risk based pricing of interest rates. This in turns lowers the cost of the mortgage making them affordable.

Introduce mortgage financial literacy campaigns- explaining mortgages, how they operate and their benefits would go a long way in ensuring that the acquisition of mortgages is done safely and free from exploitation and that the benefits of mortgages as a method of financing purchase of property are grasped. Sensitization of the public will help create confidence in the population which can translate to greater market for the growing mortgage industry.

Collecting and publishing mortgage market data- the Central Bank of Kenya can gather and publish information on mortgage market on a regular and timely basis. This could act as a vital instrument for monitoring the industry and also market development. With such reliable data from the CBK, it would create confidence in the private investors who would be more willing to pool funds into the mortgage industry for development. This however, would require cooperation from the mortgage institutions in order to work.

Establishment of mortgage liquidity facility- it’s a financial institution designed to support long term lending activities by the Primary mortgage sector. It acts as an intermediary between the Primary Mortgage market and the bond market with the aim of providing long term funding at better rates and with improved terms and conditions (World Bank Report). The mortgage liquidity facility enables capital market funding of mortgage institutions. They increase the leverage of existing funding allowing short term deposits to be converted into long term assets with mortgage liquidity facility dealing with the risk of liquidity issues.
Establishment of such a facility will enable access of long term finance mid-level lenders who may not be able to raise enough long term funding.

Creation of a mortgage development group by the stakeholders- the mortgage industry is made up of multiple parties and as well as related sectors such as construction, capital markets, the government etc. Formation of a policy group or government department under the relevant ministry would go a long way in help driving change into the industry. This would ease up the process of regulation, policy making, reviewing regulatory proposals and could push into areas such as research for the benefit of the sector. In addition, it will help in collection and publishing of industry data.

Central Bank of Kenya, World Bank, Mortgage Finance in Kenya: Survey Analysis, October 2010
Hassler, O., & Walley, S., Mortgage Liquidity Facilities, Housing Finance International, Vol. XXII No. 2 December 2007.

Republic of Kenya (2010). The Constitution of Kenya 2010.

Republic of Kenya (2004). Sessional Paper No. 3 on national Housing Policy for Kenya. Pp.2-8.

Government of Kenya/UN Habitat (2003), Kenya Slum Upgrading Programme.
The Mortgage Encyclopedia (2004). An authoritative guide to mortgage programs, practices, prices and pitfalls.

The World Bank Report. Developing Kenya’s Mortgage Market May 2011

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