A housing development along Mombasa Road. FILE PHOTO | NMG
A mortgage can cut a 25-year journey to owning a home to just a
day’s chat with your banker. But it can also reduce your 25 years of
happiness to just that one day’s chat. And you can easily sign for
either choice.
Francis Joseph Kamau Ichatha applied for
a mortgage of Sh1.3 million in 1991 and a further Sh300,000 in 1992
from Housing Finance. He was to pay a monthly instalment of Sh 26,273 at
the rate of 18 per cent a year for a period of 15 years.
Both
parties agreed that the interest rate would only be varied with the
concurrence and prior written approval at least with a four-month
notice. However, HF was accused of varying this to 26 per cent and
selling Mr Kamau’s property in 2005.
Mr Kamau then sued
HF. He accused HF of negligently and fraudulently debiting his account
with “illegal, non- contractual and unconscionable charges.”
In
court, it was ruled in August 2014 that HF was not entitled to penalty
interest, interest on arrears or default charges, bringing to an end 23
years of tussle.
“Can it therefore be said that a
practice in which the banks unilaterally decide to load the customer’s
account with penalties at their own discretion whose rates are only
known to the bank is such a certain practice that it can be said to
amount to trade usage?” posed the court.
And it is with
such cases in mind that in 2001, a financial consultancy firm, Interest
Rates Advisory Centre Limited (IRAC) was set up and is run by bankers,
advocates of the High Court of Kenya, IT consultants and other
professionals.
Overcharge a customer
It audits banking facility contracts like loans, overdrafts,
mortgages and hire-purchase agreements and reconciles them with
customers’ bank accounts. IRAC then produces a report that shows whether
a lender has overcharged or undercharged a customer.
On its website, it has a digest of cases disgruntled customers in legal fights with banks such as Housing Finance and KCB.
According
to Kenya Bankers Association CEO Habil Olaka, customers are sometimes
to blame for prioritising getting the mortgage rather than understanding
the terms first. He advises customers to ensure there is a common
understanding of the interpretation of all clauses in a mortgage
contract before appending their signatures.
“The
critical thing is that before getting into a relationship, you have to
understand what the terms for the product are,” says Mr Olaka.
“Sometimes
customers are in hurry to sign but not bother with terms and
conditions. Later on, when this is brought to their attention, they deny
ever seeing it.”
According to Wilfred Onono, the
managing consultant at IRAC, customers should make sure that such long
term contracts are backed up with a solid source of revenue that will
ensure payments are honoured on time.
“If you don’t
make your payments on time, you are in the situation of compounding
interest. The interest is debited in your account every month,
increasing your indebtedness and eventually leading to higher payments,”
says Mr Onono.
Mr Olaka says customers who run into
hard times should be brave enough to approach their banks early enough
for an honest conversation.
“Banks will be willing to
work with a customer for a way out on payment schedules. It all depends
on negotiation as opposed to being quiet and hoping that by some magic,
the bank will not come for them.”
He cautions that
defaulting without explanation invites banks to immediately fall back on
the collateral, mostly leading to loss of the property.
The
average size of a home loan advanced by Kenyan banks has risen by
nearly Sh2 million in one year to hit Sh10.9 million by end of 2017,
according to Central Bank of Kenya data.
Defaulted mortgages
Mr
Olaka advises that since mortgages come with significant amount of
money tying the bank and customer together for a long period, there is
need for this relationship to start off on common ground through
lawyers.
The bigger the amount, the more each party needs to safeguard itself using a lawyer, according to Mr Olaka.
“Customers
need somebody on their end to ensure that their interests are also
safeguarded. Banks will always put in terms to ensure that in the event
of default, they fall back on collateral. They will also ensure you pay
them ahead of meeting other monthly costs,” he explains.
Having
a lawyer, he says, is the only way to ensure no unusual terms get into
the contract. And issues of interpretation of clauses always crop up.
Even
with the onset of the era of capped interest rate, Mr Onono says some
banks say that this does not cover interest on defaulted mortgages.
This
has resulted in different interpretation, with some banks charging
interests above the maximum rate for loans in default, a case IRAC
considers an illegality.
“There are a few banks that
when we check their interest, we discover they have actually charged
more. When we ask, they say amounts in arrears are not covered in rate
caps laws. That’s subject to interpretation,” he says.
palushula@ke.nationmedia.com
No comments :
Post a Comment