Finding the money to pay for your dream home can be just as challenging as finding
the home itself. Not that you have to look in too many places: the rules that
control institutions [in Kenya] providing financial services have traditionally
imposed an unnecessarily strict system that specifies which institutions can
provide which types of products to which customers. Until recently, commercial
banks were to get them through the construction phase. Mortgage companies and
building societies then provided long-term mortgage loans to individuals to
purchase houses from developers, or less commonly, to build their own complete home.
Discerning buyers looking to get away from the housing estates and purchase a
property of appreciable value will be glad to see the entry of commercial banks
into the mortgage lending business. While first-time buyers are now spoilt for
choice, the basics of hunting for a house loan remain much the same as they always
have.
The first step should be figuring out how much you can afford to spend. Several
factors go into this decision: your income, your other debts and your anticipated
lifestyle during the life of the mortgage. Lenders need to know that you will have
the income to pay back the loan, so the mortgage period usually cannot run into
retirement (or past your 60th birthday). If you are planning a big family or hope
to travel more in later years, you may not want to saddle yourself with too large
a loan. Personal finance experts recommend that you do not borrow more that two
and a half times your annual gross income when applying for a mortgage. Some
institutions have no limits or will lend up to three times your annual income, but
taking such a large mortgage increases the chances of defaulting.
Apart from the size of the mortgage, the full cost and term of the loan are the
two other facets to consider carefully. Cost will be determined by the interest
rate over the term of the loan as well as other fees that are required. There are
two basic types of mortgages:
- Fixed rate mortgages and
- Variable/Adjustable rate mortgages.
On a
fixed-rate mortgage, you
will owe a certain percentage of the loan as interest to the lender. This amount
never changes, and your monthly payment will remain the same over the life of your
loan. The interest rate on a
variable/adjustable-rate mortgage changes to
reflect changes in the credit market, with equal payments (at the prescribed rate)
being made on a reducing balance. This is the most common type of mortgage
available. Exotic variations include mortgages with a teaser rate, where the first-
year rate is a couple of percentage points below the market rate (such as the Kenya
Housing Society facility), and others with discounted rates for borrowers who make
prompt payments over a period of time (
à la Housing Finance). There are also
some with upward limits, above which the interest rate isn't allowed to go.
How to Get a Mortgage (Part II) >>
Fred Mbugua
East African Standard, Wednesday, February 11, 2004
The views and conclusions expressed in this article are those of the
author and do not necessarily reflect those of propertykenya.com
