Homeownership Option 6: Mortgages - All You Need to Know

Becoming a homeowner is the ultimate dream for many people. But it is getting even harder to achieve this every year with the steadily rising costs of land, building materials and labour. 

According to the 2019 Kenya Population and Housing Census, only 60.8% of Kenyan households own the home they live in. That is 7,379,485 out of a total of 12,143,913 households in Kenya. In urban areas, out of a total of 4,711,664 households, only 992,465 urban households own their homes. The rest, or 21% of all urban households live in rented properties.

But as rent also increases, driven mainly by inflation and high house demand in urban areas, most Kenyans are asking themselves if taking a mortgage loan to finance their homeownership dream might be worth it. 

This article will discuss mortgage loans in the final edition of the six-part series exploring the main homeownership routes in Kenya. It will cover everything from what mortgage loans are, how to buy a home through a mortgage, the pros and cons, factors to consider when taking this path, and the pitfalls to avoid.

Read Also: Renting or Homeownership: How Do You Decide?

What is a Mortgage? 

A mortgage is a type of loan from a financial lending institution such as a bank or SACCO used to purchase or refinance real estate such as land or house. It's also referred to as a mortgage loan. 

The mortgage process involves taking a loan from a lending institution to finance the purchasing of a real estate property. The property will act as collateral as you repay the principal borrowed plus interest. 

As per your agreement with the lender, you will pay a down payment of at least 5% of the house value, and the moneylender will cover the remaining amount with the promise that you will repay the money in instalments over a certain period (typically 5-30 years). 

There are two common types of mortgages: 

Fixed Rate - This mortgage loan has a fixed interest rate. You will pay the same interest throughout the loan's duration. The lender will offer you the loan at current interest rates. 

Adjustable/Variable Rate - This mortgage loan has a changing interest rate. Throughout the loan's duration, the interests you pay will fluctuate (up or down) based on the prevailing market rates. 

The type of mortgage you receive will be determined by different factors like prevailing interest rates, your creditworthiness, the down payment you made, the amount you borrowed, and your mortgage and home insurance. 

How to Get a Mortgage in Kenya: A Step-by-Step Guide

For first-timers, navigating the mortgage process can be a tad overwhelming. It can take over 2-5 months with many meetings with your lender. While it's not the most complex homeownership route, understanding how it works can help you streamline the process, save time, and get the best deal. 

But before you start the process, you need to have enough money to cover the down payment, mortgage application fees, real estate agent costs, and insurance. If you haven't saved enough money to cover this, you might have to liquidate some investments or start saving and investing for this goal. 

Follow these seven steps when applying for a mortgage in Kenya. 

Step 1: Get an Appraisal 

Before you can hit the ground and start searching for a house to buy, you first need to approach your lender and determine how much mortgage loan you qualify for. The lender will consider different factors like income, age, stability, assets, and credit history to decide how much to offer you. 

You can approach different lenders who will all run a background check on you and offer feedback about how much loan you can get. You can compare each package you receive and settle on the ones that suit you. Once you find a property, you can approach the lender you choose at this stage. 

You should, however, keep in mind that the amount you are approved for at this stage is a rough estimate of what the lender will offer you, and it might differ from the amount you will eventually be offered after your mortgage is processed. This offer has an expiry date and is valid for a short period. 

Step 2: Find a House 

Once you have a rough idea of how much mortgage you can qualify for, the next step is finding a house to buy. Here, you'll have different options. You can choose to buy a ready-built house, an off-plan property, or take the rent-to-own route. Whichever path you take, ensure the seller accepts mortgage payment. 

Read Also: Homeownership Option 1: Buying a Ready House

You can search for property on your own by looking at real estate listings, or you can retain an agent or lawyer to hold your hand to save time and avoid any risk. 

Once you've found your house, you'll negotiate the buying price with the seller. You might also be required to put a refundable 10% deposit in an escrow account to show your commitment to buying the house. The seller will then take the property off the market. 

Step 3: Submit your Application 

At this stage, you will make your formal application to all the lenders who have approved and given you an offer. You will provide them with all your financial documents, such as payslips, bank statements, credit history, and other supporting documents that increase your chances of receiving a mortgage. 

It's important that you don't lie about anything at this stage - or any stage for that matter. If your lender notices any inconsistencies, your application might be thrown out. 

Step 4: Receive Mortgage Approval 

Your lender will take time to review all the documents you provided in the previous step and perform their due diligence. They will assess your income, debt, and creditworthiness and decide how much they can loan you. 

As a rule of thumb, most lenders will only offer you a mortgage you can repay without spending more than 50% of your monthly income servicing debts. 

Your financier will also look at the house you intend to buy and perform their own property valuation, inspection, and feasibility study before they can offer you a loan. You might need to get them in touch with the seller. 

If the lender approves your application, they will give you an official offer which you can negotiate until you agree. If the offer is too expensive and doesn't suit you, you can walk away and find a different lender.

If you had made multiple applications to different lenders as suggested in Stage 3, make sure to evaluate the most suitable for your financial situation. 

Step 5: Accept Your Mortgage Loan 

If everything ticks, the lender will approve your mortgage and provide all the terms and conditions you must accept to move forward. The terms will contain the repayment term you'll be put on, the interest you will pay, and the consequences if you default. 

Ensure you only accept a mortgage loan you are sure you can service. Defaulting might cause you severe financial losses. 

Take all the time you need to evaluate the terms and conditions. It is very important that you consider your future income potential. This evaluation is typically easier for permanent and pensionable employees who have an almost 100% guarantee of a steady income for the loan tenure. 

If you are not in this category, you need to seriously do a forecast of what your probability of continuing to earn an income will be and in what numbers in the future to ensure your homeownership is future-proofed. 

Step 6: Buy your House 

With your finances ready, you can return to the seller and complete the property acquisition. Depending on your lender, they might handle the payment and transfer the money to the seller or give you the money to complete the purchase. 

You will then embark on finishing up the legal paperwork. The house title and document's name will be transferred to the bank, which will hold it as collateral (joint ownership) until you pay back your mortgage. 

Step 7: Move into your New House. 

Congratulations, you are now a new homeowner! Once you finish the stressful and overwhelming process, you can move into your new house and say goodbye to paying rent. 

The Pros and Cons of Mortgages in Kenya

Advantages 

• An easier route to homeownership as less money is required to get started 
• Allows you to build equity as the money you pay in monthly instalments replacing rent contributes towards homeownership 
• Allows you to diversify your investment portfolio and avoid the ‘dead capital’ trap as less money is tied in the property 
• Tax relief of up to Ksh300,000 annually on the interest you pay 

Disadvantages 

• Increasing interest rates will have you pay way more than you borrowed if the interest structure is variable. 
• Risk of losing the property in case you default on your monthly payments 
• You might pay many additional fees you can avoid if you take a different route, including interest, mortgage insurance, application, processing fee, and even an early repayment charge.
  

Read Also: Homeownership Option 3: Building From Scratch 

Factors to Consider Before Taking a Mortgage Loan in Kenya

Type of mortgage: Your risk tolerance will determine the type of mortgage you take. While a fixed mortgage helps you budget since the monthly payments are fixed, you may end up paying more in the long run. A variable mortgage can help you pay less in interest if rates drop - but if they rise, you pay more. 

Upfront Fees: Before you take a mortgage, consider how much you want to pay in a down payment. The more you pay out of pocket, the more house equity you get outright and less interest you will pay. You will also have negotiation power and can bargain for a lower rate and longer repayment window. 

Hidden Fees: Mortgages come with many fees you will pay before and after approval. These fees will add up at the end of the day, and if not careful, it can affect your budget. Factor in all the additional payments you will make in your budget before taking this homeownership route. 

Debt to income ratio: A mortgage is an extended loan; therefore, before taking it, ensure that you can meet all the monthly payments without affecting your lifestyle. Consider all the other debts you are servicing and ensure you are not spending more than half your income to pay loans. Also important is, are you going to take other loan types in the future? You probably are, which means you may want to be sure that the repayments on your mortgage are not going to lock you out of another bank loan that could have been used to say, take advantage of an opportunity or deal with an emergency. 

Pitfalls to Avoid When Taking a Mortgage Loan 

A mortgage can help you buy a house pretty quickly as less money is paid upfront; however, it can cause significant financial damage if you are not careful. Here are some common pitfalls to avoid when taking a mortgage loan. 

• Approaching one Lender: Different lenders have different terms and fees. Before settling on one, talk to different lenders and compare all your offers. Ask for a full breakdown of all the payments and fees you will pay and settle on the lender with the package that appeals to you. Shopping around can help you save money. 

• Losing your Income: Losing your income while still paying your mortgage can lead you to default and lose your house. You should take necessary steps like increasing your income streams and getting mortgage insurance to avoid foreclosure when losing your primary source of income. 

Read Also: How to Protect Yourself From Loss of Income 

• Future Expenses: When thinking about a mortgage, you should factor in future expenses that might affect your budget and repayment. You should plan how to factor in all your future bills like educating your children, retirement planning, and health emergencies. You should be able to meet all your other financial goals while also servicing your loan. 

• Affordability: Before taking a mortgage or any loan for that matter, it is crucial to be sure that you can afford it. Just because you were approved for a certain amount doesn't mean you should take it. Only take loans you are sure you can repay without stretching yourself and affecting your lifestyle. 

WRAPPING UP

Getting a mortgage can be daunting, and with so much paperwork, research, and money involved, it can be scary and overwhelming for first-timers. Before taking this route, it is essential that you talk to your financial advisor, who can help you figure out how much loan you can afford to pay, how to raise your down payment, and how to invest and save to pay back the loan. 

You should also consider getting your mortgage through the government-backed Kenya Mortgage Refinancing Company (KMRC), which will allow you to get loans at lower than market rates and a longer repayment window. This means you will pay lower monthly instalments and lower interest in the long run compared to borrowing directly from a bank or SACCO. Your real estate agent or lawyer can help you through the process and ensure you get the best deal.

Like all other homeownership routes, Mortgages might not be the best option for everyone. It can allow you to achieve your homeownership dream faster, but when you factor in the interest you will pay, you might buy the house for almost double the market value. Research all the homeownership options available and settle with the one that suits you financially.