Why the Reverse Mortgage is Good for the Kenyan Market

Over the last two years, the Kenyan banking sector has been plagued with various issues including the collapse of two commercial banks followed closely by statutory capping of interest rates. Banks are now displaying increased appetite for collateralized borrowing, with land being very favourable collateral. Surprisingly though, many Kenyan homeowners are reluctant to take advantage of bank facilities due to a long-entrenched (and sometimes unfounded) fear of bank loans. 

It is for the above reasons that the reverse mortgage has been lauded as having the potential to be an extremely good fit for the Kenyan market: one because it is secured on land assets, and two because it is premised on deferred payment; thus directly addressing the core anxieties of the banks and the homeowners respectively.  

A reverse mortgage is a bank loan targeted at senior citizens who are the registered proprietors of their homes, using the home as collateral. The loan does not generally have to be repaid until a certain period after the last surviving homeowner moves out of the property or passes away. At that time, the bank will usually sell the home to repay the balance of the reverse mortgage, and the beneficiaries of the estate receive any remaining surplus from the sale proceeds. 

In countries where banks offer reverse mortgages, the law gives an age threshold for who may qualify. The amount of money the borrower can receive is determined by several factors which could include age, statutory interest rate margins, the home’s appraised value, how much it was purchased for and the maximum lending limit. Payment to the borrower can be lump sum, monthly while the borrower occupies the home, periodic advances through a line of credit or a combination of the foregoing. 

The home must meet minimum property construction standards which can be set by the National Buildings Inspectorate or other competent institution(s). Most single-family homes and townhouses, approved condominiums and prefabricated homes are eligible for a reverse mortgage loan. 

After obtaining a reverse mortgage, a borrower must continue to pay property taxes and any other official charges on the land. The borrower is also required to live in the home as their primary residence. The loan does not become due as long as the borrower occupies the home and continues to meet all other prescribed loan conditions. The borrower can also opt to make payments on their reverse mortgage, but they are not required to.

For banks, the benefit of the reverse mortgage is that, all factors remaining constant, the home will have appreciated in value by the time the loan becomes due and payable. This is therefore a guarantee that the bank will recover its outlay in full thus reducing the credit risk.   

A reverse mortgage can be very attractive to such older citizens who usually have exhausted all their life savings in the quest for home ownership. This is because it allows them to pull the equity out of their home. Reverse mortgage loans can be used to pay for home renovations, emergency medical expenses, daily living expenses, holidays and cruises etc. Homeowners who have an existing mortgage can even use the reverse mortgage loan to pay off their existing mortgage and eliminate monthly mortgage payments. 

A huge selling point for the reverse mortgage is the fact that the estate of the borrower is not personally liable for any additional mortgage debt if the home sells for less than the reverse mortgage loan amount.

In a related twist, the national government in collaboration with several county governments, has identified mass housing as one of its big agenda for the current term and aims to provide half a million low-cost/affordable housing units to the average citizen. It is therefore foreseeable that in the near future, home ownership will extend to a larger spectrum including middle and low-income families, which will then improve their access to credit. 

Borrowing on its success in other jurisdictions, and riding on banks’ appetite for collateral and the foreseeable spike in home ownership in Kenya, the reverse mortgage has the potential to achieve huge gains for the banking sector.