Mortgage myths that make home ownership painful

Investing in a home often involves securing a mortgage loan, with a finance agent helping to manage the business and property aspects of the home to ensure the best use of your money.

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Mortgages, often the most accessible path to homeownership, are still widely misunderstood and underused in Kenya. Many misconceptions, such as perceived complexities and financing concerns, contribute to a general reluctance to explore mortgage options.

These myths can create unnecessary hesitation, causing many to abandon the goal of owning a home. A common belief is that homeownership is prohibitively expensive and limited to the wealthy, which restricts broader participation in the housing market.

While high-end properties have historically dominated the market, recent efforts - especially government-backed initiatives aimed at affordable housing - are making homeownership more achievable.

The Kenya Mortgage Refinance Company and several lenders, for instance, now offer mortgage rates as low as 9 percent, giving low- and middle-income earners a realistic path to owning a home.

Another misconception is that the mortgage process is overly complex and costly. While obtaining a mortgage does involve several steps, these measures are in place to protect both the lender and the borrower, ensuring the investment is secure.

Concerns about hidden or "closing" costs frequently arise, often adding to the reluctance many feel toward mortgages. However, lenders provide clear, upfront information on each cost throughout the home-buying process.

Each fee, from legal charges to valuation and insurance plays a specific role in securing the property, safeguarding the investment, and ensuring both parties are protected.

By clarifying these costs and their purposes, lenders aim to make the mortgage journey as transparent and manageable as possible.

For example, legal fees play an essential role, as lawyers handle the legal documentation, verify property ownership, conduct necessary searches, and ensure that contractual obligations are met. This protects the buyer’s investment and helps prevent future disputes.

Mortgage protection insurance is another key component, providing coverage for the borrower’s life during the loan term. In the event of death or serious illness, the insurance company covers the remaining loan balance or a portion of it, depending on the condition.

Homeowners comprehensive insurance adds another layer of security by protecting the property from risks like fire, earthquakes, and floods.

Property valuation is also a necessary step, confirming the property’s condition, value, and suitability for lending. This process determines the insurable value needed for calculating insurance premiums.

Stamp duty, a government tax on property transactions, is another notable cost and can be up to 4 percent of the property's value, depending on its location.

While these costs may seem significant, they are crucial to securing the property and managing risks. Previously, homeowners were required to provide a substantial deposit, usually between 10 and 30 percent of the property’s value.

Now, many lenders accept more flexible deposits, and some even offer up to 105 percent financing to cover both the property cost and deposit.

Some borrowers worry about the lender's claim on the property, which is held as security for the mortgage term. Current laws, however, provide strict regulations around this.

If payments are missed, the bank must follow due process, including a post-valuation to assess the current market value and sufficient notice to the borrower before any sale can proceed.

Another common area of confusion is the duration of mortgage payments. Mortgage repayments are calculated on a reducing balance basis, meaning that monthly payments are determined by the loan amount, tenure, and interest rate.

Borrowers can reduce the mortgage term by making larger monthly payments or lump-sum contributions to reduce the principal balance.

It is also worth noting that, as financial literacy grows, so does the understanding of mortgages as a long-term investment rather than a burden.

Mortgages allow individuals to gradually build equity in a property, often with monthly payments similar to or even lower than rent, which brings greater financial stability over time.

By viewing mortgages in this way, aspiring homeowners can see that, despite initial costs, they are ultimately investing in an asset that provides security and value for the future.

Mortgages represent a practical, affordable option for individuals across different income levels. Aspiring homeowners should seek guidance from qualified experts who can help them make sound choices, making homeownership a more manageable and rewarding experience.

The writer is the Head of Mortgage at Absa Bank Kenya PLC.

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