Homeownership is one of the hottest topics, and one of the ways to own a home is through a mortgage. While mortgage rates in Kenya are insanely high, few people still take this route to homeownership. But, with the reduced mortgage rates of 7% for low-income earners in Kenya, it’s finally possible for anyone earning Ksh 150,000 and below to afford a home loan.
Sweet as that sounds, does it mean you should rush to the nearest financial institution and apply for one? Probably not. Below is a guide on mortgages for beginners that can guide you in your decision-making.
What is a mortgage?
It is a loan one takes to buy a property. If your lender approves your application, you will have monthly repayments of the principal amount and the interest. Here’s how mortgages differ from regular loans:
- They have longer timeframes- ranging from 10 to 30 years
- The property you are purchasing is usually the security, and the lender can repossess it when you fail to make your payments
The interest rates could be lower than that of other loans, but this will depend on where you live. Some countries have mortgage rates of as low as 2 – 3%, while others are over 15%.
Why take one? One reason may be that you are in a tight financial situation and you are not in a position to come up with the cash required to pay for the property. Even if you have the money, you might take a mortgage to avoid using all your liquid cash on one investment. That money can go towards other investments with higher returns.
Types of Mortgages in Kenya
As the name suggests, the interest rate remains the same throughout the term of the mortgage. Most fixed-rate mortgages have a repayment period of 15 to 30 years. These types of home loans are not affected by market fluctuations, and this can go both ways for you.
You could miss out on a big reduction in the interest rates if the market rates drop within the period of your mortgage. It could also be a good thing, as you would avoid a drastic increase in the interest rates if market rates do increase.
While fixed-rate mortgages make it easy for you to budget, your initial deposit will be quite high compared to other types of mortgages. It’s also important to keep in mind that a more extended repayment period means you will be paying more interest, making the debt expensive.
If you wish to apply for this type, do so when the current market rates are not high.
2. Variable / Adjustable Rate (ARM)
These have interest rates that vary from time to time. The initial interest is usually lower and fixed for a specific period, like five years. After this, the interest varies, depending on the arranged frequencies with the lender. The changing frequency could be monthly, quarterly, yearly, etc.
The lender will adjust the interest rate based on an index and the agreed margin. An adjustment index is a standard interest that reflects the prevailing market rates. It could be the LIBOR rate, the Central Bank of Kenya (CBK) rate, or the treasury bill (T-bill). The margin is the agreed rate above the adjustment index. If, for example, you agree to a margin of 1.5%, your ARM will be the LIBOR rate + 1.5%.
ARMs are best when the prevailing rates are low. With this, you will end up paying low amounts during the initial period when the interest rate is fixed.
Depending on the lender, you will have an array of additional fees when applying for the mortgage. Below are some of the common ones;
- Legal fees – to pay legal services and depends on the loan amount
- Stamp duty – for the registration of documents transferred for the ownership of the property
- Insurance – mostly life and property insurance covers
- Valuation fees – a certain percentage of the property value
- Ledger fees – for account maintenance and amounts depend on the bank’s charges
- Negotiation fees – a percentage of the property value
Post Mortgage Expenses to Consider
Properties always need maintenance- from fixing the gutter to driveways or home appliances. If any of these costs crop up and between you and the repayments you’ve nothing left, it can sink you deeper into debt.
2. Utility bills
The mortgage does not include utility bills like power, gas, trash, and sewer, among others. Before committing to any lender, ensure you can still afford to pay your utility bills.
3. Association Fees
If you buy a property in some areas, like gated communities or apartments, there is a high chance there are additional costs for the maintenance of the property and the area. These range from monthly service charges to security and landscaping. Ensure the fees are not expensive for you.
Advantages of mortgages
- It allows you to own a home without paying for it in cash.
- It frees your money for other investment projects with higher returns.
- Most countries have mortgages as a tax-deductible benefit, which helps you lower the amount you owe Uncle Sam. Well, reducing your tax liability should not be the leading cause of applying for a home loan, but if you can afford it, it’s an added advantage.
- It can help improve your credit score. A long-term loan with regular and up-to-date payments is a sign to creditors that you are a reliable borrower. With this, they are more likely to give you more credit, like credit cards or car loans.
Disadvantages of mortgages
- Repossession – since the house is the collateral, your lender can easily repossess it when you fail to meet your repayments. If this happens, you will lose the home and all the money you have paid for it to that point.
- It’s expensive – home loans are long-term debts with an interest component and other fees. In the long run, these amounts are always higher compared to buying the property in cash.
We all need a roof over our heads, and taking a mortgage is one way to go about it. It helps you build up your equity in the long run and also frees up your liquid cash for other investments. However, the interest rates and the longer repayment periods make them more expensive than buying a property in cash. Before you rush to apply for any plans, you should weigh all your options. Ensure that you have a fat emergency fund account and liquid cash to cater for other extra expenses like renovations and home appliances.