The bitter option: Mortgage or personal loan?

Many Kenyans want to own homes but they cannot raise enough money to fund the purchase. But for those who can afford to borrow, the question usually is whether to take a home loan or go for ‘softer loans’ from sources as diverse as Saccos, writes  WANGECI KANYEKI

Raising money to buy a dream property has been a major challenge for the majority of Kenyans. Most people miss out on great opportunities to purchase a ready house or a plot simply because they cannot raise finances required for the deal.

With banks preferring to lend to salaried people, those who run their own businesses find it difficult to get financiers.

Luckily, there are a number of funding options that self-employed people and even salaried people can use to raise funds to buy property.

They include mortgages, personal loans, Sacco loans and personal loans.

Mortgage, defined by investopedia.com as “a debt instrument secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments”, is increasingly becoming a popular mode of funding property purchase in Kenya. However, its uptake is still low. A mortgage is a loan specifically tailored for property purchase without having to raise the entire value of the purchase upfront. It therefore has a longer tenure of 15 to 20 years, which enables ease of payment so that the borrower is still able to meet their other financial obligations.

PROS AND CONS

But the question is: If you were to borrow to finance your house purchase, would you go for a mortgage or a personal loan? Head of mortgages at CfC Stanbic Bank, Austin Waga, says taking a personal loan, which usually has a shorter term than a mortgage, can create a cash-crunch as it demands higher monthly repayments.

He recommends that one should pay more than the minimum required amount to clear off the loan faster.

Mortgages also have the added advantage of undergoing a rigorous due diligence process, making it difficult to charge a non-existent property. This is not always the case with personal loans, Sacco loans and cash sales, meaning there are more loopholes for fraudsters.

“Because of this it is always important to employ the services of a conveyance laywer so as to stem fraud,” says Waga.

He also recommends that one only pays the initial required deposit such as ten per cent rather than the whole amount, just in case the deal goes wrong. The balance should be paid only when the transaction is complete.

Another advantage of mortgages is that it is always priced lower than personal loans. Due to associated risks, a personal loan usually attracts a higher interest rate than the mortgage. However, most Kenyans prefer quick money and are not willing to go through the slow conveyancing mortgage process, which takes between 60 to 90 days.

It is important to note that banks have a lending limit on personal loans, which restricts the borrower’s ability to access bigger loans. According to Timothy Gitonga, Director of Business Operations at Housing Finance, personal unsecured loans have a higher default rate because most of them are used to meet consumption needs such as holidays, furniture and school fees, thereby increasing the temptation to default as value is not seen after short-lived gratification. 

It is not recommended for small and medium entreprises to use their savings to buy property as this would tie up working capital, which may be required to re-invest into the business. In this case, mortgage is a better option as it can be serviced from profits rather than savings.

The other common option to finance property purchase is borrowing from a Sacco. “Using a Sacco has many benefits, such as lower interest rates and less documentation. The terms and conditions are relaxed as they are based on share contribution and availability of guarantors,” says Ben Mandi, a personal finance consultant with Cibi Consultants.

The process, though much faster than banks, is limited by the fact that they may not be able to give long-term loans beyond ten years. Mandi, however, cautions that even though some banks now lend amounts covering total property cost, the option of taking a 100 per cent mortage will load a borrower with huge monthly repayments.

It is better, he says, to plan ahead and save for the deposit required so as to reduce the burden. A Sh5 million house, for instance, would require Sh500,000.

For some people this amount could take many years to raise and by the time they raise the amount, the price of the house could have shot up significantly.

ALTERNATIVE

A second alternative would be to have to borrow the ten per cent from a Sacco, which has lower interest rates and less documentation.

Other options of raising the deposit for a property would be to use other assets to attain the goal such as cars and plots or borrow from family and friends.

He advises any prospective property buyer to set two goals when buying a property. The first is a short-term goal of raising the deposit required which includes legal fees, stamp duty and valuation. The second goal is to take a mortgage.

“Plan ahead of your property purchase by setting aside some savings to raise deposit required,” says Mandi.

To raise a deposit, he advises, one can utilise other assets to such as vehicles or plots. “Where there are no assets or savings available, you can take a softer short-term loan from a Sacco or borrow from family or friends to pay for your deposit.”

PAY OFF LOAN FAST

Paying off your off a loan as quickly as possible, he adds, is lightens a borrower’s burden: “Paying even a Sh1,000 over and above your normal monthly repayment has a compounding effect and will go a long way in paying off your principal and interest. Any lump-sum income such as bonuses and windfalls should go towards clearing the loan.” Before lending, the bank will assess the borrower’s ability to pay back. One should have enough disposable income to comfortably service the loan and leave you with a reserve to cater for expenses, says Gitonga.

Banks also checks your credit records with Credit Reference Bureau and will request for proof of purpose.