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By Caroline Owala, Associate at Grant Thornton.

Mortgage Interest Deduction in Kenya’s Finance Bill 2025.

The Kenyan Finance Bill 2025 introduces a key change to mortgage interest deductions, expanding tax relief to include construction loans. Under Section 15(3)(b) of the Income Tax Act (ITA), taxpayers can now claim an annual deduction of up to Kes 360,000 on interest paid for building, buying, or improving a residential property—provided the loan is from one of Kenya’s top six financial institutions listed in the Fourth Schedule.  

Previously, the deduction only applied to home purchases or renovations, leaving out those constructing houses from scratch. The new provision encourages homeownership and real estate investment by allowing Kenyans to reduce their taxable income through mortgage interest deductions, even for newly built homes.  

However, there are key restrictions:  

  • The deduction applies to only one residential property.  
  • If the homeowner occupies the property for less than a year, the deduction is reduced proportionally.  
  • The Kes 360,000 cap remains, limiting relief for high-value mortgages.  

The change

The bill now proposes to introduce construction mortgage so that one can claim interest deduction on loan obtained for constructing one’s house, buying or improvement of the premises as long as one intends to reside in it and not for rental purpose.

The impact

Taxpayers are now able to build houses from the ground up and claim the interest deduction up to Kes 360,000 therefore encouraging investment and home ownership. This change supports housing affordability, particularly for middle-income earners investing in construction. However, critics argue that the deduction limit is too low to significantly offset costs in high-interest environments. Additionally, restricting eligibility to loans from only six institutions may limit access for some borrowers.