What you need to know before going for a mortgage

By Francis Ayieko

Kenya: The recently released State of Development Report revealed some interesting trends in the property market in Nairobi.

One, the report said most developments being planned are in Embakasi and Kilimani, while the least is planned for Thome and Githurai.

Secondly, it noted that land availability is uneven across the city, with Runda having over 470 vacant plots suitable for development while Kilimani has just 12.

The report says that Kenyan property prices have risen almost three-fold in the last decade. It also says the market is underleveraged, with a near insignificant proportion of mortgage financed purchasing.

As the report rightly points out, the ongoing high housing demand and rising shortages have ensured that housing prices remain high. This, coupled with high interest rates, has led to the “near insignificant proportion of mortgage financed purchasing” the report is talking about.

But the mortgage market is growing, albeit slowly. In January, The Mortgage Company estimated that the country currently has about 22,000 mortgage accounts, up from the figure of 20,000 that was being bandied around late last year.

This figure is mostly being pushed up by the upper middle-class who cannot pay cash for a house but also find it difficult to buy a piece of land on city fringes and go through the rigours of putting up their own houses.

For this group, mortgage is a better option. The challenge is that sometimes, such people have adequate income to meet their loan obligations but still fail to qualify for a mortgage.

Experts say that for a successful mortgage loan application, it is important to understand the obligations of the bank and the process involved.

Self-evaluation

The process starts with self-evaluation to determine one’s level of financial commitment and psychological preparation before a mortgage lender can interview you to determine the various options available.

The interview stage helps the potential lender to assess the level of risk involved lending you money. It is here the lender will determine your ability to pay, willingness to pay, debt capacity within your given income and your age, purpose or use of the property.

Past credit history is a key factor and can impact on the decision to lend. This could relate to previous loan facilities, management of credit cards, rental obligations, local government services fees or telephone bills.

According to mortgage lender Housing Finance, mortgage firms review the property that is being purchased to verify that the home is in good repair condition, the title documents are free of any encumbrances, and that the purchase price compares to property values in the area.

“Mortgage lenders will not like to issue loans on properties whose values are not ascertained or where values do not tie in with the prices because it would lead to a substantial loss to their clients and to the bank,” the lender says in a write-up.

Buyer’s equity

The other major aspect of the loan decision lies in evaluating the buyer’s equity, or down payment, says Housing Finance, noting that the lender wants to make sure that the funds being used by the buyer have been achieved through savings; equity in other sold assets.

“Any type of borrowed funds has a negative impact on the borrower’s cash flow and hence reduces his capacity to repay,” it says.

It is important to look at things from the lender’s point of view. It wouldn’t make good business sense for them to loan money to someone who is already saddled with debts and bills to pay.

As Housing Finance notes, those who want to go the mortgage way must first learn how to live within their means by getting their spending under control.

— fayieko@standardmedia.co.ke