Most people desire to own a home and escape the rent hustles that come with living under someone’s property.
However, owning a home is expensive and accessing the money required to buy or build one upfront can be a nightmare.
Most people who buy a home, therefore, do so with a mortgage. A mortgage is a necessity if you can’t pay the full cost of a home out of pocket.
There are some cases where it makes sense to have a mortgage on your home even though you have the money to pay it off.
In Kenya, however, taking a mortgage doesn’t make financial sense anymore according to financial advisor George Mangs.
Mangs, the founder of investment firm Marketcap Trainers, encourages people to rent while working on getting a home rather than jumping for a mortgage.
“Mortgages in Kenya are currently averaging at about 11 to 13 per cent. If you take a mortgage for a period of 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,” argues Mangs.
“The capital base you spend on an expensive mortgage could be invested in other vehicles with better returns that could have otherwise been invested for better returns that could enable you to acquire a similar or even better house and still be able to keep change without ever sliding into multi-million debt.”
At 13%, Kenya has one of the highest mortgage rates in the world. For instance, South Africa has a mortgage rate of 7%, the UK has 3%, the US has 2.6% and Canada has 2.5%
In Kenya for example if you took a mortgage from Absa Bank Kenya worth Sh. 4 million at an interest rate of 11.9 per cent for a period of 25 years, and you make the minimum deposit of Sh. 400,000, you will be paying Sh. 46,017 per month.
Your total repayment for the loan will be Sh. 13,805,119.
Out of this, the total interest you will pay the bank will be Sh. 9,805,119. Stamp duty, legal fees, valuation and insurance will consume a total of Sh. 241,000. If the same loan is taken for a period of 5 years, your total repayment will be Sh. 5,859,202.
If you took a Ksh 15 million house mortgaged at 11% will have monthly payments of between Sh. 190,000 and Sh. 210,000 depending on where you get the mortgage from. Mangs believe this doesn’t make any sense for anyone looking to own a home.
“That is a house that collects about Sh. 75,000 in rent monthly, which is equivalent to about 0.5 per cent of the cost of the house,” he says.
“If you are to rent that house and invest the difference of about Sh. 135,000 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 went on:
“After 15 years, it will be worth around Sh. 38 million. Your Sh. 135,000 government paper investment at 0.8 per cent per month (or 9.6 per cent per year) will translate to around Sh. 54 million at the end of 15 years. This means that you would still be able to buy the house at Sh. 38 million and still have an extra Sh. 12 million in your pocket,” he says.
There are a wide variety of mortgage options out there, and they can vary based on the size of the loan, the amount of time you’ll take to repay it (or term), the interest rate type, and whether they’re part of a special program.
It pays to learn about the risks of each type before making a decision.
Mangs advises you to make sure you have a proper financial map for the payment before commenting.
“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 extremely 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. This is because you forfeit your capital during your productive years on nothing but the house.”