When is it advisable to keep renting rather than buying or building?
Where your rent is equal to the interest you would pay per month, it is worth considering a mortgage.
Q: I refer to the advice you gave regarding home ownership last week. Yes, everyone dreams about becoming a homeowner, but does it make sense when it is clearly beyond one’s financial reach? Life is more than owning a home, it is also about living a dignified life, meeting your obligations, and taking care of yourself and family. This obsession with owning a house is the source of many people’s misery. With this in mind, when is it advisable to rent, rather than buy or build a home? While at it, could you also tackle the issue of our obsession with land? Is it really a worthwhile investment?
Pius
A: Thank you, Pius, for raising this insightful question touching on the craze for home ownership and obsession with land purchase. First, a home is a basic need, which explains the strong feelings people have about it, both negative and positive. Perhaps what falls short is how they approach the size of the home they need relative to their financial health.
Though the choices one makes are social and emotive, they have financial consequences. The fact is that the world is full of people who make wrong choices about home ownership, leading to regret and misery.
For example, when you visit your rural countryside, you will see many incomplete rural home projects built by retirees pursuing their youth era dreams after retirement, but which were not completed because the money ran out. In such a case, the timing for the decision and the financial implication of the decision were not right.
For most people, a home is the largest investment they will ever make, the decision must therefore go through a thorough process that will lead to a win-win situation especially after retirement.
A decision to own a home requires wide consultation with professionals who have the skills and experience in the different areas of property before you arrive at a reasonable conclusion in terms of the size of the home and cost. Whether you want to buy a ready house or to build one, the decision will have financial consequences that need to have been understood before embarking on the journey.
The government has in the recent past made many changes to the Pension Funds Law to enable people to own homes. This was in recognition of the low savings reality in Kenya powered by a poor saving culture. The latest option allows one to withdraw up to 40 percent of their pension.
In partnership with the World Bank, the government has also made available affordable mortgages at low interest rates of up to nine percent in over 20 financial institutions (11 SACCOs and 9 commercial banks).
This is geared towards enhancing home ownership, particularly among the income groups previously unable to embark on the home ownership journey due to high-cost mortgage loans and lack of savings to provide for the mandatory 10 percent deposit required if you seek a mortgage.
The amount you withdraw and the size of home you purchase or build must be guided by sound advice since you will be dipping into your retirement nest. Whatever decision you make, it must not jeopardise your comfort during retirement.
On the issue of whether to rent or buy, compare the amount of rent you pay per month against the interest component of your mortgage. Where your rent is equal to the interest you would pay per month, it is worth considering a mortgage.
You will be forced to pay slightly more than the rent, but the additional payment is your capital towards acquiring the house. This capital component of the instalment increases over time as the interest reduces to your advantage.
You also raised a concern regarding the craze for land ownership. Strictly speaking, land banking is not an investment in entirety. Land is an economic resource of production just like labour and other resources of production.
A decision to buy is best informed by the opportunity that piece of land in its specific location or nearby environment presents for future use. You should be able to develop this mental picture at the point of the purchase.
Also, a me-too strategy in buying land is dangerous because of capital gains, the main income from holding is time bound and is driven by the speed of economic activities around that location. Land purchased in pursuit of reliable information based on government plans that will bring infrastructure to a location is likely to pay off.
Patrick Wameyo is a financial literacy and entrepreneurship coach at Financial Academy & Technologies. [email protected].
