Why are the mortgage rates high?

Owning a home in a well-planned neighbourhood with close proximity to all the necessary infrastructure is a dream many people seek to realise.
For those who are not able to build their own houses, this dream is only possible if they take a bank loan to buy a house.
Two years ago, Edgar Apenya, took out a mortgage in a local bank to purchase a house located in a prime area in the outskirts of Kampala.

“The house and the surrounding land were valued at Shs400m. Of course, I could not afford to pay this money at once or even in instalments. My friends advised me to apply for a bank loan.”
The loan was processed, with the house and the land as collateral. However, with the recent instability in the economy, Apenya is a worried man.
“What if the interest rate goes up?” he asks.
“I know that in some banks it has already happened. This could mean that I will take a longer time repaying the loan.”

The reason Apenya is scared is because his house is security and yet home ownership is a big component of the socioeconomic transformation in any economy.
In Uganda, many people are now conscious of the environment they want to live in. Because of this, they want to buy or build a house in one of the secure areas since gone are the days when one would build anywhere where there was a piece of land.
This explains why if they can afford, many urban dwellers are seeking to buy homes in developed estates because these are ready to live in. But the challenge is that the nascent rise in the real estate sector has moved almost hand in hand with the growth of the mortgage sector.

Increase in lending rates
Last month, Bank of Uganda increased its key lending Central Bank Rate from 14.5 per cent to 16 per cent due to inflationary pressure from the continuing weakening of the Shilling against the dollar.
Also, there are the localised effects of the excessive cash in circulation in the run-up to the 2016 general election, which are likely to exacerbate the situation.
This is the third time the Central Bank is increasing its lending rate. In response, some banks have increased interest rates to both new and existing customers to as high as 29 per cent.
Increasing interest rates will likely translate into a slowdown in the number of people applying for loans.

Mathias Katamba, managing director Housing Finance Bank, which has the highest percentage of mortgage buyers, says increasing lending rates will reduce on the growth of private sector credit, which will in turn lead to a reduction in the number of people buying homes.
“The Central Bank revises rates as a monetary policy instrument to control inflation. A lot of money in circulation funds consumption, thus leading to a rise in inflation. When the lending rates increase, it becomes more expensive to borrow money, so most people wait until the rates go down so that they can spend. A slowdown in borrowing definitely affects the banking industry,” Mr Katamba says.

Existing customers
Because Ugandan banks currently only offer variable rate mortgages, any changes in base lending rates directly translates into increased interest rates for new and existing customers.
Mukembo adds; “However, it has been noted in several instances that when conditions improve, banks are not necessarily quick to revise the rates downwards.”
The mortgage repayment periods are typically fixed term, with up to 25 years for Shilling products. As such, repayment periods remain in force for the term of the mortgage despite changes in the economy.
However, Katamba argues; “As a bank, while we have increased the interest rates for new borrowers, we are cautious about increasing the rates for our old customers. For now, their interest rates have remained the same as we continue to study the changes in the economy.”

The mortgage types
Ugandan banks do not offer fixed rate mortgages. Instead, clients are given variable rate mortgages, which are exposed to the changing economic conditions.
With a variable rate, customers may end up paying significantly more by the end of the term of the mortgage.
Arthur Mukembo, the regional director RE/MAX, a real estate firm, says with less than 10,000 mortgages in the country, any upward changes in pricing will slow down their demand.
“Consumers with shilling incomes are likely to defer decisions to finance new home purchases using mortgages. On the other hand, we will instead see a steady flow of cash deals around distressed real estate and owners looking to free up capital,” Mukembo says.
There is also likely to be an increase in ‘land banking’ activity, where consumers edge more towards speculative buying and holding of land.

Effects of the weak Shilling and the options
If a client is earning in Shillings and has to buy foreign currency to make payments, then he or she will pay more than what they originally had to pay when they took out a mortgage.
“If you have to purchase dollars to make a $1,000 monthly payment on your mortgage, you would be spending about 28 per cent more Shillings for each dollar today than you would have one year ago, says Mukembo.”

Increasing mortgage defaults
Slow economic activity and rising interest rates will likely lead to an increase in the number of people failing to meet their mortgage payments.
It is anticipated that there will be a flurry of activity in the foreclosure and distressed property segments.
“This will fuel diminishing bank appetite for such deals since banks are naturally prudent about risk management,” says Mukembo. “Consequently there will be a sharp drop in residential mortgage products, until around the third quarter of 2016.”

The options
Although there is a continued appreciation of land and home prices, unfortunately the same cannot be said for household incomes.
Currently, home ownership in Uganda is on a build-to-occupy and build-to-let basis, with the former being by far the more predominant model.
“Individuals buy or inherit ‘plots’ and then build structures on them over time,” says Mukembo. “Buoyed by the emergence of serviced plots in urban and peri-urban communities, this remains an accessible route or most middle income households.”
Even the build-to-own model is subject to the effects of the lending rates as banks offer loan facilities for those seeking to build or renovate their own homes, or purchase land.

Government intervention
Mukembo argues that enabling legislation and economic policy will have to be put in place by the government. “This will allow the emergence of models like the rent-to-own, developer financing, and others to reduce the lending risk for banks. This will give them the incentive to offer more competitively priced products to the masses.”
Katamba predicts that the current condition is not permanent. “It is a cycle and we shall come up again. We are teaming up with developers to improve the access to mortgages and facilitate our customers in owning their homes.”

In the Diaspora
There is likely to see an upsurge in Diaspora mortgage as banks continue to develop specialist products to tap into this forex opportunity. Furthermore, Diaspora customers have more reliable financial information and a ready appreciation for organised developments making them ideal targets for banks and property developers alike.

Caution
• Shop around. Talk to multiple banks to get familiar with typical offers.
• Pay attention to the terms. banks are now required to walk you through a Key Facts Document (KFD) summarising the costs to be incurred in operating a specific account or product.
• Get your finances in order. Especially true for non-salaried

borrowers – banks want to understand the sources of your income in order to arrive at a reliable assessment of the predictability and sustainability of your future earnings hence ability to pay them. Make sure your business records are thoroughly prepared and in good order. In a volatile frontier market like ours, you are a better candidate for a mortgage if you have multiple steady streams of income from salary and investments.
• Buy property in an organised development. This property is more likely to have steady appreciation over time than standalone property.
• Get life and property insurance. Some banks do not insist on it but it is highly recommended to get insurance cover for life and property if granted the mortgage. That small extra investment could come in extremely handy in case of sudden death or incapacitation.