A time to settle down: What are the pros and cons of KMRC-backed mortgages?

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I am in the market to buy a house to settle my family. I am interested in mortgage financing. I have heard enough horror stories about the pure banks facilities to know its best to steer clear. The other option is the KMRC backed loans. How does that work, and what are the pros and cons of this financing method.

Thank you for reaching out with this valid question. Settling one's family is a noble undertaking that speaks to a sense of responsibility.It is a big investment decision that requires  a cautious approach to weigh various options before you act.

That said, if I had some additional key information on issues to do with your age and the sale price of the targeted home I would effectively respond to your question. But nevertheless, I will make some assumptions to anchor some of the estimates that I will make in this article. As such, let us assume that you are 35 years old.

However, before I do a deep dive into the numbers, let's put a few social issues into perspective.

Having a residential home is a noble course with different paths

Whereas having a home is a noble thing, there are varied options of ticking this box and each comes with its pros and cons.

The ideal path is to build your home using what you have saved. This saves you the cost of borrowing, which is usually a significant portion of your loan repayments. On the other hand, it also exposes you to construction stresses that you may not have the bandwidth to handle.

The next viable alternative is to seek financing. Financing is the most practical route as many people of your age would not have accumulated savings to the level that can enable them to walk into a developer’s office and instantly purchase a house.

Financing can be applied directly or indirectly. You can opt for a mortgage to purchase a house that is ready for occupation, or you may also consider a construction loan.

Your enquiry narrows down to how a mortgage works and more specifically, the option of leveraging Kenya Mortgage Refinance Company (KMRC)-backed mortgages. Broadly speaking, KMRC, a State-backed refinance institution, cushions home buyers from the exorbitant interest rates that most market players have been charging.

I will give a generalised view of how most mortgages work. Consider visiting any of the KMRC offices to get a more accurate assessment of your borrowing capacity.

That said, most home loans will be biased towards the purchase of urban residential houses for non-commercial purposes or building an urban residential property for a borrower’s occupancy. They usually cap the loan repayment period at 25 years or until normal retirement age of 60 though some may consider extending to age 65 for the self-employed.

Primary home lenders leverage KMRC to refinance affordable home loans capped at Sh8 million to individual borrowers whose monthly household income is not more than Sh150,000. This income threshold is however not considered where the home loan is a market home loan above the affordable home loan.

Consider price you will have to pay

Price or cost of borrowing is the right term as opposed to discussing interest which is usually not in your interest. This puts everything into perspective as you look at what you are about to sign up for.

A home with a sale price of Sh10 million where you have made a down payment of 10 percent at a cost of borrowing of 9 percent (as may be the case with KMRC (which lends at single digit interest rate) may demand upwards of Sh75,000 monthly (excluding tax and insurance) over a tenure of 25 years.

This means you will spend around Sh22.6 million on your house where Sh13.6 million will go towards interest and Sh9 million repaying the principal.

Similarly, a home with a sale price of Sh15 million on the same terms as above will mean that you will spend around Sh33.9 million where Sh20.4 million will go towards interest while Sh13.5 million will go towards the principal.

How KMRC works is that where the sale price of the house is more than the affordable housing cap, then the lending institution may structure the amount loaned into two parts. One part will cover up to the affordable housing threshold and the other part will be at market rate subject to the primary lender’s terms which varies from one primary lender to another.

You have significantly increased your monthly rent

Let us work with the house priced at Sh10 million. There are a few fundamental questions. Do you accept that for the next 25 years you will have a monthly obligation of Sh75,000 that behaves exactly like rent?

Do you realise that you will still have monthly deadlines with consequences for as long as you have not finished the mortgage repayments? Will this house be worth Sh22.6 million by the time you finish paying for it?

Now that you are ready to spend Sh75,000 on housing per month, have you found out how much you would be paying per month as rent if you were to rent a similar apartment or house in the same estate? What if you maintained the Sh75,000 monthly spend and split it such that one part paid this rent and the other part goes into savings?

How much will the saved portion accrue to in the next 25 years if you leveraged the magic of compounding? Will your family outgrow this house in the near future?

A house to “live on” vs a house to “live in”

I believe that one needs to acquire at least two houses in life. A house to live on and a house to live in, and strictly in that order. I also believe that it is easier and far much cheaper to delay your immediate gratification and save for what you need.

I fault most mortgage lenders for always insisting that the first home loan must be for a residential dwelling or occupancy by the borrower.

This policy has crippled many people financially by boxing them into buying the house to live in first with high chances that they may never regain the financial capacity to acquire the next house to now live on.

I further believe that it is easier to scale and acquire the second house to live in, if you started with the house to live on first than it is if you did things vice versa.

Please take your time and research more about mortgages. There is a reason why there are only around 30,000 mortgages issued by commercial banks in our economy which boasts over 600,000 households. I think there must be a better approach to housing out there!

The writer is the Director of Retirement Solutions at Kuza Asset Management Ltd. He can be reached via [email protected]

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