The effects of GDP growth rate on mortgage interest rates in Kenya

Abstract

Mortgage is a long term loan that ties a prospective homeowner down to mortgage repayment for a period of 3 to 30 years or transfer of a legal or equitable interest in a specific immovable property for the payment of debt. Mortgage loans are given out with the repayment of interest and principal amount until the debt is settled. Following liberalization of interest rates, mortgage rates fluctuates very frenguently to respond to change in demand and supply of loanable funds in the financial market. This study seeks to determine the effect of GDP growth rate on the mortgage interest rates variation in Kenya. The study adopted a survey research design by looking at retrospective review on GDP growth rate, and the interest rates levied on mortgage loans between 2003 and 2013. The study used secondary sources to collect data from; Kenya Bankers Association, Central Bank of Kenya and International Monetary Fund. The data was analyzed using linear regression and Pearson correlation coefficient analysis methods, conducted at 95% confidence level. The study established that there is a positive relationship between mortgage interest rates and GDP growth rate (economic growth). The study concluded that although GDP growth rate affects the mortgage interest rates, it is a weak relationship suggesting existence of other strong factors that require further investigation. The study recommended that mortgage firms should charge interest rates appropriately to attract and enable many low income earners to use mortgage facilities to mortgage market. The Government through Central Bank should initiate policy that regulate interest rates. The ultimate goal is to see many Kenyans able to take up mortgage loans at affordable rates both in urban and rural areas.