Be smart with mortgage payments

NAIROBI, KENYA: Something interesting is happening in the American housing market that Kenyan lenders, mortgage borrowers and other stakeholders in the real estate sector should pay attention to.

The American Enterprise Institute has partnered with the Neighbourhood Assistance Corporation of America, a housing advocacy organisation, to help roll out a new 15-year mortgage designed to allow borrowers to build equity more quickly.

Known as the Wealth Building Home Loan, the mortgage features a low fixed interest rate and little or no down payment. The loans also carry no additional fees.

Developers of the concept believe that an affordable, 15-year loan could, with government support, be “a game-changer” for lending because “you’re going from a debt model to an equity model”.

The idea is to have buyers pay huge deposits so as to greatly reduce the monthly repayment amounts.

On a $100,000 (Sh8.8 million) mortgage at three per cent, for example, a $6,000 (Sh528,000) down payment could bring the rate permanently down to zero, an official said, meaning that “every penny you pay will go to principal.”

One of the main challenges potential mortgage borrowers in Kenya face is the requirement to raise a deposit, which is usually about 10 per cent of the price of the house they are buying.

To their credit, some lenders are now offering 100 per cent mortgages, meaning the borrower is not required to raise any deposit. A few others, like Housing Finance and Kenya Commercial Bank, are now offering 105 per cent mortgage financing, which covers the full price of the house one is buying (no deposit required) and closing costs like stamp duty, valuation fees and legal charges.

This makes entry into the property market easier. The downside, however, is that it translates into higher monthly instalments for the buyer.

A smart buyer, however, should pay as much as possible upfront.

Putting up a higher equity not only reduces the size of the monthly repayment, but also acts as an insurance against unpredictable interest rates, especially if the borrower’s income is not rising or guaranteed.

 Premise

This is what the two American organisations are trying to help buyers achieve. It is hinged on the premise that owning a home boils down to saving more, borrowing less and paying less.

This means you must build personal savings to help you raise a substantial amount in deposit.

There is no better place this works than in off-plan purchases.

Normally, developers require home buyers to put down at least a ten per cent deposit to secure a booking on a house before its construction even starts.

A wise mortgage buyer would pay the 10 per cent deposit, then make an effort to regularly pay some more during the construction period. By the time the house is ready, they would have paid about 30 per cent, meaning they would only need to borrow 70 per cent.

For example, for a Sh10 million house, you pay the ten per cent or Sh1 million deposit required and get approval for a 90 per cent mortgage.

You can decide to either put funds aside in a savings account or to pay the developer an amount equivalent to the monthly mortgage repayment every month.

At an interest rate of 23 per cent, the monthly repayment for the Sh9 million mortgage repayable in 15 years would be Sh178,350. After completion of the construction after 18 months, you would have saved a total of Sh3,210,300, meaning you only need to take a mortgage of Sh5,790,000 by the time the construction of the house is done. Your monthly repayment would be Sh114,740.

If you had not saved and put down a higher deposit, you would take on a 90 per cent mortgage, meaning you would be required to pay Sh178,350 per month.

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