Reduce the stress of loans and mortgages
Loans and mortgages are causes of financial stress in many households. Are there ways to reduce the burden? Dr Samuel Njoroge, a finance and investment consultant explains.
1. Pay the establishment fees in cash
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It has to start from the point where you are negotiating the mortgage. Every mortgage will have establishment fees such as legal fee, mortgage insurance and appraisal fees. One way to deal with them is by paying them in cash instead of capitalising them. Capitalising is where the bank or lender tells you that they will add all those fees to your loan, so that you pay them together, such that you do not give any cash. When you capitalise them, your loan increases, which means your interest also goes up. So the best thing would be to pay the establishment fees in cash.
2. Make extra payments principal only
Where the lender of the mortgage allows, and in most cases they do, it is possible to make extra principal payments and mark them as principal only. What that means is that whenever you make a monthly installment, it has two components: the principal and the interest. If the lender allows you to make an extra payment, say you were paying sh 10,000 a month and you come with an extra sh10,000, you can agree with the lender that the extra payment you have made should go to principal only. That ends up reducing your principal -- if the principal is reducing, then the interest also decreases.
3. Make payments every two weeks
Where the mortgage is payable monthly, where possible make the payments every two weeks. If, for instance, you are supposed to pay sh10,000 every month, pay sh5,000 after every two weeks. Because a year has 52 weeks, you will find that if you make the payments after every two weeks, it means you have paid 26 times, and the result is that at the end of the year you will have made a total of 13 payments instead of the normal 12 had you paid monthly. That means you will make an extra monthly payment every year, which will go towards reducing your loan. When the loan reduces, the interest also reduces.
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A windfall is where you get unexpected extra money, for instance, a bonus at work, a company you have invested in pays huge dividends that you were not expecting – put all those windfalls into the mortgage payment.
5. Re-finance the mortgage
Refinancing means selling off the loan to another lender, and then you pay the new lender instead. If, for example, you have taken a sh10 million mortgage for 30 years, and you have paid sh2 million off from the sh10 million and sh8 million remains, then you can get another lender willing to pay off that loanfrom the initial lender, then reduce the payment period to 15 years. It will then be easier to pay because it will be accompanied by a lower interest rate and it will be possible to negotiate further.
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The initial payment for any loan has two components: the principal and the interest. Make initial higher payments than what the lender is asking for. If, for instance, you are supposed to pay sh10,000 every month and you have the ability to pay sh20,000 initially, just pay it because it goes towards reducing the principal amount, which leads to reducing the interest too.
2. Make rounded payments
This means that if you are supposed to pay sh10,420, make a payment of sh11,000. That extra sh580 will add up to Sh 5800 if you make 10 payments, which reduces the loan without stretching you out so much.
3. Pay using a standing order
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It is easier to pay a loan through a standing order than making direct deposits at the bank. It will prevent instances of using the money for emergencies, which will lead to default. If you default, there are extra charges, which makes the loan bigger and complicates the whole payment.
4. Sell the loan
Even after you have taken the loan, keep an eye out for better offers with lower interest rates. Lenders will sometimes come with very good marketing offers in order to attract clients. Do not take a loan and then just relax. Keep looking. So if you get somewhere you can negotiate for a lower rate of interest, sell the initial loan off. Approach the second lender, tell them about the loan you have in the other bank and ask them to buy it off. Now that you have a lower interest rate, the amount you were paying in the initial bank, you can use to pay a higher amount in the new bank. If you have a sh1 million loan and you are paying sh10,000 per month at a 14 per cent interest, then you get another bank or a savings and credit society where you can pay it off at 12 per cent interest. You can apply the savings that you are making on the interest and pay, maybe sh10,500 or sh11,000. That means you pay your loan faster. The faster you pay it, the cheaper it is.
5. Sell off assets to pay the loan
These are mostly household assets that you do not need. Sell them and apply the money to the loan. You can place them online for buyers or sell by word of mouth. Everyone has such assets. They can be as simple as books that your child who is done with a certain class no longer needs. If they are in good condition and the curriculum has not changed, you can sell them to other parents at discounted prices.