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The Finance Act 2025 extends mortgage interest tax relief to loans for constructing homes, allowing annual deductions up to KES 360,000. While aimed at boosting homeownership and housing demand, its low cap and rising construction costs limit impact. Recommendations include raising the cap, expanding eligibility and promoting affordable financing.
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The Finance Act 2025 introduces a key policy change by extending mortgage interest tax relief to include loans for constructing residential homes. Taxpayers can now claim annual deductions of up to KES 360,000 on interest paid for building, purchasing or improving owner-occupied properties. While the reform aims to promote homeownership and stimulate the housing sector, limitations such as the relatively low deduction cap and rising construction costs pose challenges. This report analyzes the impacts, identifies key findings, and provides recommendations for enhancing the policy’s effectiveness.
Kenya continues to experience low homeownership rates, with 72.3% of urban households renting (KNBS 2023/24 Housing Survey). Escalating land prices, mortgage rates averaging 12.5% (2025), and an average construction cost increase of 12.03% have further strained aspiring homeowners. The Finance Act 2025 responds to these challenges by broadening the scope of mortgage interest deductions to include loans for constructing residential properties, aiming to make homeownership more attainable and drive investment in real estate.
Stakeholder Perspectives
Positive Impacts:
+ Incentivizes homeownership and residential construction
+ Stimulates related industries (cement, steel, labor)
+ Reduces tax burden for middle-income families
+ Aligns with national affordable housing goals
Challenges:
- Limited impact for high-value urban mortgages
- Excludes rental property investors
- Benefits skewed toward formal sector earners
- Potential fiscal strain on government revenue
Opportunities:
- Leverage Public-Private Partnerships (PPPs) for housing infrastructure
- Develop inclusive housing finance models for informal sector earners
– Raise Deduction Cap: Adjust beyond KES 360,000 to reflect real market conditions.
– Expand Eligibility: Include rental housing investments to address urban deficits.
– Promote Affordable Financing: Partner with lenders to lower mortgage rates.
– Support PPPs: Encourage efficient infrastructure delivery through competitive bidding.
– Monitor Uptake: Establish tracking mechanisms to assess impact on homeownership rates.
– Kenya National Bureau of Statistics (2023/24) – Housing Survey
– Integrum Construction (2025) – Building Rates per Sqm/ft
– Treasury Circular – Tax Relief for Home Construction Loans
– Boma Yangu – Affordable Housing Programme (AHP)
– Housing Finance in Kenya – Mortgage Interest Rates and Affordable Options
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