PURPOSE: Access to decent and affordable housing remains one of the greatest challenges in Sub-Sahara African exacerbated by its exponential population growth rate and low income levels. Whilst mortgage has proven to be a superior approach to housing finance in developed countries, this has not been the case in developing countries where ridiculous interest charges have effectively priced the middle and low income groups out of the mortgage market. This study provides an empirical examination of the determinants of mortgage interest rates and effective borrowing costs in Rwanda, and the implications thereof for residential mortgage demand and affordability.

DESIGN: The study combines secondary data (mainly macroeconomic indicators) with primary information obtained by questionnaires and interviews with the major mortgage lenders in Rwanda.

FINDINGS: The study reveals that, at the current interest rates, mortgages are affordable to less than five percent of the Rwandan population. The high cost of borrowing is driven primarily by the lender’s cost of funds, unstable macroeconomic environment (exchange rate and inflation), inflation, liquidity, default risks, and lack of access to long term funds.

RESEARCH LIMITATIONS: The mortgage market in Rwanda is still very young, and as such, access to longer time-series data was unavailable to permit a more robust analysis.

PRACTICAL IMPLICATIONS: There is the need to integrate the housing finance market to the broader capital market to ensure access to long time funding and reduce asset-liability mismatches on the part of mortgage lenders. This will also reduce the risk borne by the primary mortgage lenders and transfer the risk to capital market investors who are better able to handle such risks. The government of Rwanda should partner with Rwanda Social Security Board (RSSB) and life insurance companies to provide a mortgage liquidity facility to ensure constant supply of mortgage funds to the commercial banks.

ORIGINALITY: The study provides primary empirical explanations for the reasons behind the high interest rates on mortgages. By identifying the primary reasons behind this, it offers more relevant recommendations to help curtail this situation Keywords: housing, mortgage, interest rate, effective borrowing cost, affordability, mortgage liquidity facility