Never search for a house to buy before doing the math

Buying a house is an emotional process and one is always advised to view it at least twice before deciding.

But, the key question in owning a home is, can you afford the house? Or does it make more economic sense for you to buy or rent a house?

According to the Kenya Bankers Association (KBA) housing pricing index, while 72 per cent of Kenyans finance homes from personal savings, mortgages have continued to increase in recent years to approximately 22,000 in 2014. But, why are mortgages not attractive to the mainstream?

The rule of the thumb is that you should be able to go for a mortgage three times your income. With the current interest rates and high transactional costs, including stamp duty, legal fees, insurance and valuation we lean towards to banks offering up to 105 per cent mortgage financing.

One wise woman said that one should not “stretch yourself too much with a mortgage. Buy within your means. It’s not worth the sleepless nights.”

As a first-time home buyer who is going to be responsible for a mortgage for 15 years, you should take your time and understand the offers, various financing options and charges.

A mortgage has three important aspects: down payment, monthly payment and fees. Traditionally, majority of banks that offer mortgage financing require a 20 per cent down payment while they finance 80 per cent. But, in Kenya some banks are offering up to 105 per cent financing.

Why? The banks have realised that the high transactional fees pose a challenge to an individual when buying a home and hence they offer to include them in a package.

With a rising middle class, one would expect that individuals would rush into home ownership but, in Kenya, people are calculating. Why? One word: affordability.

According to KBA home ownership survey (2015), some of the barriers to home ownership are new homes are already too expensive , lack of financing options and high interest rates. Let’s focus on interest rates and mortgage financing options.

Suppose you want to buy a house for Sh6 million at an average market rate of 15 per cent for 15 years at 80 per cent mortgage financing, your, monthly payment is approximately Sh67,000.

How many of home owners could afford this? Or when you opt for 105 per cent option, your monthly payment is approximately Sh88,000.

The cumulative difference between the two (80 per cent and 105 per cent) is immensely high. In addition, it’s usually a condition to an insurance cover for the property.

It can be a one-off cost or spread out in your mortgage. Note that insurance cost is influenced by the amount the bank finances your mortgage.

For example, at 105 per cent the bank takes a higher risk and hence more insurance cost. And, under this option, the bank requires more collateral from a home owner than usual (new home), for example, fixed asset.

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At this point, you should have noted your monthly payment is influenced by what percentage the bank finances, interest rates and total length of time it will take to pay off your mortgage.

The longer the length of time, the lower the monthly payments but the more interest you will pay.

Home buying doesn’t begin with home searching. It begins with mortgage prequalification. Approach a mortgage adviser or financial adviser before starting a search.

This guidance best works for you. It’s fun shopping around for a new home and boring sitting with an adviser, exposing your financial situation fearing the words “You don’t qualify for a mortgage” but it is better to live within your means.

The writer is a financial adviser at Anchorage Limited.