Using your house as a piggy-bank

Many people own their houses outright or are at an advanced stage of paying off their mortgages. Embracing the equity release concept could see you wring more out of your property, writes FRANCIS AYIEKO

One of the beautiful things about real estate investments,” Caroline Kariuki says, “is that they serve you now and provide you with an asset that will support your needs in future.”

Caroline, the managing director of The Mortgage Company — a Nairobi-based mortgage brokerage firm — says that your piece of real estate can help you purchase another property, invest in a business, pay for college education, or even go on holiday.

Today, it is possible for a property owner to convert the current value of his or her property into equity and pay off debts comfortably or meet other needs that require huge financial outlay, thanks to the concept of equity release, which is becoming popular with property owners.

“Equity release takes advantage of the growth of the value of your home over time, and gives you access to the additional value that your house has created over time to do other things,” says Kariuki.

Whether you are servicing a mortgage or you have a house with no mortgage on it — maybe because you constructed it with your own money or you have cleared the mortgage repayment on it — your house has an accumulated equity, which can be ‘released’ to do other things.

The ‘releasing of equity’ happens when you borrow a loan against the property based on its current accumulated value.

Equity

For a non-mortgaged house, the equity is 100 per cent, which is usually the equivalent of the current market value of the property. However, equity value in a mortgaged property is obtained by subtracting the outstanding mortgage loan from the current market value of the property.

For example, suppose you took a mortgage ten years ago to buy a Sh7 million house in Nairobi; if you valued that house today, it would perhaps be worth about Sh18 million, thanks to high capital appreciation over the last few years.

Your equity on the property would, therefore, be the Sh11 million (Sh18 million minus Sh7 million) appreciation in value plus what you have repaid the lender so far.

If you decided to secure a bank loan based on this accumulated equity, you would be said to ‘release’ equity in that property. Hence, equity released can simply be defined as a way of raising money against the current accumulated value of your property.   

“Once you have invested in a property and made significant payments into your mortgage, you can take advantage of the capital gains in your property to get financing to meet other needs,” says Kariuki.

According to Justus Munene, the managing director of Daytons Valuers, property owners usually turn to equity release when they want to meet other financial needs such as paying school fees, starting up a business, furnishing a house, buying another property, or even going on an expensive holiday.

“Many property owners are realising that instead of having their Sh10 million house just lying there, they can release it to do other things,” says Munene, describing equity release as a once moribund product, which only made a comeback with the resurgence of the property and mortgage markets about ten years ago.

“It was a moribund product that has been successfully marketed and given prominence,” he notes. He explains that the product was stifled by the hard economic times of the 1990s that saw many mortgage holders lose their properties to banks that were on an auctioning spree as a result of massive defaults. 

However, he says that since Kenya’s real estate market started booming again after the Narc regime took over power at the beginning of 2003, the product is becoming popular again.

“The uptake of equity release has taken shape; it is now only second to construction loans,” he says.

The good thing about equity release is that it is very flexible in terms of how you use the money, as you do not necessarily have to tell the bank what you will do with the money. What matters is that you can demonstrate your ability to repay.

“When clients come to us, we are not concerned about what they are going to do with the money; we are only concerned about their ability to repay. They can use the money to renovate the house, buy shares or go on holiday. The motivation is to get cash to invest in other things,” says Frank Ireri, Housing Finance Managing Director.

Housing Finance launched equity release in 2009 as one of their innovative products. On their website, the company has lumped equity release with top-up loans, describing the philosophy behind this product thus: “As you repay your mortgage, you acquire equity in that property, which can be availed to you for further property development or other uses. We can lend you money on the value of your own equity.”

Awareness

Ireri says that when they launched the product, they had to market it aggressively because many people were not aware of it. “But for us,” he says, “we had seen an opportunity to exploit. It is a successful product.”

If you are taking equity release at the tail end of your mortgage repayment, it is described as top-up. This, perhaps, explains why Housing Finance has put the two products — equity release and top-up — together as though they are one and the same.

As a top-up loan, equity release simply helps the borrower to ‘reinstate’ the original mortgage. For example, if you had taken a Sh8 million mortgage and now have an outstanding balance of Sh5 million, you could ‘reinstate’ the Sh8 million loan by borrowing another Sh3 million to fulfill other obligations on the basis of the accumulated equity.

But according to George Laboso, the head of mortgages at Family Bank, equity release is best suited for those who have paid off their mortgage and now have the house “just sitting there”.

In an earlier interview, Laboso said that at Family Bank, their equity release philosophy is simple: “If you already have a mortgage with us, and you have a short term need, say, you need a quick Sh2 million, we release the money to you.”

On his part, Ireri discloses that most beneficiaries of equity release from Housing Finance are existing customers with property whose titles are already charged to the mortgage lender.

Most financiers are increasingly embracing equity release as a major product in their portfolios. For instance, in October 2011, CfC Stanbic Bank staged a major equity release advertising campaign in the press.

Describing it as Property Owner Loan, the bank promised homeowners a loan of up to 90 per cent of the value of their properties. The loan, the bank said, could be used for school fees, medical expenses, or even for buying a new car.

On its website, CfC Stanbic Bank says that with equity release, homeowners can unlock the value of their homes by borrowing money against their property.

Under this arrangement, the bank notes, those who already own homes, can borrow up to 90 per cent of the value of the property, the maximum loan repayment period being 20 years.

Barclays Bank and Standard Chartered Bank also offer equity release. Standard Chartered Bank says that its equity release product “enables you to take advantage of freed up collateral to recapitalise your business or buy another property”.

Some experts, however, warn property owners who are still repaying mortgage may overburden themselves financially when they opt to take equity release.

“Do not let equity release drain you financially. Before you go for it, you must carefully assess your ability to repay the loan and the mortgage,” says Godfrey Mutuma, a valuer.

Kariuki says that equity release may not be for every property owner. “We recognise that equity release isn’t for everyone. So, we will take the time to listen to your needs and concerns and if we think it is not right for you, we will tell you,” she says.

The other drawback of equity release is that sometimes, borrowers divert the money, using it for purposes other than the originally intended purpose.