What you need to know:
- Mortgages in Kenya are currently averaging at about 11 to 13 percent
- If you take a mortgage for 15 years, you will end up spending so much a colossal sum on a house, and thereby deny yourself a chance to create a solid capital base
Homeownership is a major deal for most of us. Owning a home or property is seen as the hallmark of financial achievement. The high accord with which homeownership is regarded has also spurred the growth of mortgages.
This growth has in return netted tens of thousands of Kenyans. Paying off your mortgage is not as easy as filling your mortgage application documents. That bright smile of the credit officer can change into a threatening one after a default.
Which raises the question: is taking a mortgage really worth it in Kenya?
Current mortgage cost estimates
According to George Mangs, an investment expert and the founder of the investment firm Market Cap, it is better to rent as opposed to taking a mortgage. "Mortgages in Kenya are currently averaging at about 11 to 13 percent. If you take a mortgage for 15 years, you will end up spending so much a colossal sum on a house, and thereby deny yourself a chance to create a solid capital base," he says.
"The capital base you spend on an expensive mortgage could be invested in other vehicles with better returns that will enable you to acquire a similar or even better house and still be able to keep change without sliding into debt."
A spot check on the Absa Bank Kenya's home calculator shows that if you get a mortgage for a house worth Sh4 million at an interest rate of 11.9 percent for 25 years, with a minimum deposit of Sh400,000, you will be paying Sh46,017 per month. Your total repayment for the loan will be Sh13,805,119.
Out of this, the total interest you will pay the bank will be Sh9,805,119. According to the Kenya Bankers Association's Cost of Credit tool, the same mortgage loan at an interest rate of 13 percent at KCB would incur a total interest of Sh8,580,621.
The total final amount will be Sh14,197,777. At Equity, you would pay the same total of interest as at KCB. However, the total amount you'd pay would be Sh12,982,560 at an interest rate of 13 percent.
There are several alternatives to taking a mortgage that favour renting. According to Mangs, a Sh15 million house mortgaged out at the current rates will attract monthly payments of between Sh190,000 and Sh210,000 monthly. "That is a house that collects about Sh75,000 in rent monthly," he says. "If you are to rent that house and invest the difference of about Sh135,000 in a safe asset like a government bond, you will have cash flow, no debt, not to mention the liquidity factor.
The mortgaged 'house owner' doesn't have these privileges besides the psychological benefits of 'owning a home'," he says.
Mangs adds that in the end, your home may appreciate at 10 percent per annum (which will be inclusive of 5 percent inflation, and 5 percent real interest) since it's an asset.
"After 15 years, it will be worth around Sh38 million. Your Sh135,000 government paper investment at 0.8 percent per month (or 9.6 per cent per year) will translate to around Sh54 million at the end of 15 years. This means that you would still be able to buy the house at Sh38 million and still have an extra Sh12 million," he says.
Location and changing needs
Acquiring a house may also be more of a sentimental investment. "It is easy to be trapped into debt to satisfy your psychological need to have the feeling of homeownership, and be categorised as a homeowner," says social psychologist Raphael Odaya.
However, beyond the sentimental satisfaction of owning a home, your house may not repay the amount of money you borrowed. At the same time, your homeownership priorities today might change by the time you're done paying off your mortgage.
Such a change may be compounded by age and retirement. "If you take a 15-year apartment mortgage at age 45 years in Nairobi, you may find that you no longer want to live in an apartment at age 60, and instead want to relocate upcountry or want to settle in a bungalow in the outskirts of Nairobi," says Odaya.
If you had not taken the mortgage and instead put your money in a government bond, you will not only have sufficient capital to put up a retirement home but also have the liquidity to sustain you in retirement. At the same time, you must consider your income and what you want to achieve during your most productive years, and whether the mortgage you want to take will allow you.
According to Mangs, you must first look at your financial position and be sure that the monthly mortgage payments are not going to dent your cash flows. "This will give you financial legroom to navigate through any investment opportunities that may come knocking.
Because the reality of mortgages is that they are financially binding contracts," he says. "They leave you so financially incapacitated that if not thought out well, you may end up owning a house but nothing else."
Kenya Mortgage Refinance program
This is a State agency program which offers cash to banks and Saccos for onward lending to aspiring homeowners. This lending is given at an annual interest rate of 5 per cent. The banks and Sacco's who get this cash are supposed to lend it out at a single-digit interest rate which is lower than the average mortgage market rate of 12.06 per cent.
This program gives loans to workers who make less than Sh150,000. Loans from KMRC are capped at Sh4 million for Kenyans living in the Nairobi metropolitan area. Kenyans living outside this area get a maximum of Sh3 million. These loan amounts come with a repayment period of up to 20 years. According to Mangs, this will allow more people to access home credit at more affordable rates.
How Kenya's 13 per cent mortgage rate compares with some other countries:
· United States mortgage rate: 2.6 per cent
· United Kingdom mortgage rate: 3 per cent
· Canada mortgage rate: 2.5 per cent
· South Africa rate: 7 per cent
· Brazil rate: Between 5 and 7 per cent
According to Mangs, this comparison means that taking a mortgage in our country will badly dent your growth potential as an individual.
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