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September 12, 2022

Construction Loans in Kenya

Although construction loans in Kenya can be costly with comparatively high-interest rates, the fact is- we’ve seen developers who’ve calculatedly leveraged them for successful real estate projects.

On the flip side, however, reports from various banks show that a fair number of the funded projects usually bite the dust. And as a result, financial institutions in Kenya apply very strict qualification requirements for construction loans.

Make no mistake though. Construction loans in Kenya are not mortgage loans. While some banks give their debtors the option of converting their construction loans into long-term mortgages, these are two distinctively different credit products.

And in case you’re wondering, the answer is yes- construction loans are far more complicated than mortgages. Qualifying for one is not that simple.

But, get this. That’s not even the hardest part. Managing your loan funds well enough to complete your building project is the biggest challenge here. Then, of course, there’s the loan repayment process to worry about.

All in all, how everything pans out depends substantially on how you choose to approach the whole thing from the start.

Now, to help you plan accordingly, here’s a detailed guide that walks you through all the basics of borrowing construction loans in Kenya.

What Is a Construction Loan In Kenya?

A construction loan is a special credit product that you secure from a bank to finance your building project. And to qualify for one, you’ll be required to take full responsibility for your project, as well as appoint licensed construction professionals (who’ll subsequently be vetted by your bank).

Now, unlike mortgages, construction loans in Kenya are disbursed in several stages as the construction progresses.

You essentially present proof of the work progress at each stage (usually in the form of construction certificates) for the bank to process the subsequent disbursement. Then once your construction project is complete, the bank processes the final remittance after reviewing your building’s occupation certificate.

And while occupancy certificates are usually issued by the local governments, interim certificates, certificates of practical completion, and certificates of making good defects are typically prepared by your project manager. You’ll need them at different stages to access additional funding from your bank.

It’s worth noting, however, that your bank won’t be generous enough to give you a long repayment amnesty period. In most cases, Kenyan banks require developers to begin depositing interest-only repayments during the construction period. And when the project is completed, your installments will then include the principal amount plus interest.

Hence, you might want to shorten your construction project period as much as possible. Otherwise, a substantial increase in time translates to more interest repayments and higher construction loan costs.

Construction Loans Vs Mortgages in Kenya

As you’ve probably guessed already, mortgages happen to be far more popular in Kenya than construction loans.

Wondering why?

Well, here’s the thing about construction loans in Kenya. While traditional mortgages use an existing building as collateral, construction loans don’t have much to fall back on if you default on your payments during construction. Most banks would probably seize your land and auction everything, including what’s left of your construction project.

Therefore, banks perceive construction loans to be considerably riskier than mortgage loans. And to offset the risk, they typically apply higher interest rates, release the funds in stages instead of one complete lump sum, as well as qualify applicants based on stringent requirements.

That said, here are the precise requirements most of the banks expect you to meet if you want to qualify for a construction loan in Kenya:

Requirements of a Construction Loan in Kenya

  • A Down payment of At Least 20-25%: To cover the huge risk, construction loan lenders typically require applicants to commit by attaching a minimum of about 20-25% of the total construction amount.
  • Proof of Income: Your bank will require you to prove that you’re indeed capable of comfortably repaying the loan over the long haul.
  • A Team of Licensed Professionals: The last thing your bank wants is taking unnecessary risks with its money. So, of course, you must be backed by a team of well-qualified and licensed professionals with sound profiles. This is something that lenders will always confirm as they process applications for construction loans in Kenya. They usually seek registration documents from the project architects, structural engineers, quantity surveyors, and contractors (along with the corresponding contract agreements). Then for larger projects, they might additionally request your construction project manager’s credentials.
  • A “Blue Book”: This refers to the documentation that details the scope of your construction project- from the architectural and structural drawings, to the cost and profit statements, plus a comprehensive project timeline. Each of these documents should be drafted and adequately certified by the relevant licensed professionals.
  • Milestone Certificates: Since construction loans in Kenya are usually disbursed in multiple installments, your bank will require you to submit a proper certificate for each significant project milestone you achieve. Your project manager should help you with the relevant interim certificates, the certificates of practical completion, and the final certificates of making good defects. Then after each submission, the bank will proceed to conduct site inspections before releasing funds for the subsequent milestone.

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