What home buyers must know before getting a mortgage

One of the biggest concerns you may have about a mortgage is the fear of taking long repayments as opposed to taking an unsecured loan. [iStockphoto] 

Recent research by The Kenya Institute for Public Policy Research and Analysis (Kippra) showed that the majority of individuals who own homes in Nairobi acquired the properties in cash, revealing the gap that exists in access to affordable financing for home loans.

Experts reckon that many people fear mortgages because they are often perceived as a product for the well-off. 

“People imagine mortgages as loans for large amounts, like Sh50 million or Sh14 million, and so on,” notes Absa Bank Kenya Senior Product Manager Stella Karoki.

However, players in the real estate market - both government and private sector - are moving to demystify that mortgage is expensive and meant for high-income people. This is as the President William Ruto government races to construct over 200,000 units annually to plug an ever-expanding housing deficit. 

Ms Karoki talked to Real Estate about the misconceptions around mortgages. 

What should potential homeowners look out for when taking up mortgages and what are the merits?

When you buy a house with a mortgage, you can immediately move in and start living there. The rent you were previously paying can be converted into loan repayments. So, essentially, the additional amount you will have to pay towards the loan will be relatively small and manageable.

This is better than struggling to build a home by taking unsecured loans which have risks such as the struggle to repay or taking a longer period to build a house or taking multiple loans to buy land, building materials, pay workers etcetera. 

We are a shareholder of the Kenya Mortgage and Refinance Company (KMRC) and through our partnership with them, we have been able to offer loan amounts as low as Sh4 million, which is the same amount an average customer can receive as an unsecured loan.

We are promoting the option of construction financing, where customers can build houses on their existing land. We have noticed that many customers currently opt for unsecured loans to buy land and build houses. However, we can also provide a mortgage, we can assist them in building a house, taking into account the value of the asset as a 10 per cent contribution towards the mortgage.

 Why do Kenyans still seem overly sceptical about mortgages? 

One of the biggest concerns you may have about a mortgage is the fear of taking long repayments as opposed to taking an unsecured loan. It’s true, the length of time you pay for a mortgage is an important consideration.

Absa Bank Kenya Senior Product Manager Stella Karoki. [File, Standard]

While a 15-year or 20-year term may initially seem like a long commitment, it is essential to note that it doesn’t mean you must keep the loan for the entire duration.

At Absa, we don’t impose any additional repayment fees if you have extra income and choose to pay off the loan sooner. So, while you may indicate a 15-year term based on your pay slip, it’s important to select a mortgage amount that fits within your financial capabilities.

Another fear is layoff and inability to service. In the event of a layoff, we offer what we call payment protection cover. This insurance coverage assists with your loan repayment for a period of nine months.

Our assumption is that within those nine months, you would have likely secured another job. This insurance coverage ensures that your loan payments are taken care of during that period, preventing any negative impact on your loan status.

Lastly, we also require homeowners to obtain fire insurance to protect their houses in the unfortunate event of a fire while they are still in the process of paying off their mortgage. These insurance covers, which are part of the mortgage terms, provide peace of mind during the repayment period.

How is the implementation of risk-based lending likely to affect the mortgage market and uptake?

I think it would be a good idea because currently, most mortgages end up with similar interest rates. However, with a new system in place, we can distinguish between good borrowers and excellent ones.

Excellent borrowers will get even better rates than what is currently available. So, it may not be a big change in attracting more customers, but we will see more customers coming in who meet the criteria for better rates.

When it comes to mortgages, the interest rate is not the main concern for most people. It’s more about the long-term commitment and the large amount of money involved. The government has taken steps to make housing more affordable and lower rates.

As a result, more customers are trying to get that assistance and have a smoother mortgage process. In short, I believe this decision is a good one and will make both new and existing customers happy.

How will the KMRC’s raising of the size of subsidised home loans to Sh8 million impact uptake in the short to medium terms?

Well, in Kenya, there is a significant housing shortage. The supply of houses is lower than the demand. Initially, the uptake has been slow, but we anticipate an increase in the number of customers in the coming years.

A cultural mindset change is important so that people view mortgages as a viable option for homeownership. The key thing here is to educate customers that they can help you achieve your dream house faster and with better financing options.

This will open doors for more customers to appreciate the benefits of a mortgage and engage in the process of homeownership. Ultimately, we will see more people able to afford and acquire houses.

The rising inflation is leading to the high cost of building and buying houses... 

From a construction perspective, the cost per square meter is an important factor when considering how much it will cost you to build a full house. Due to increased costs during Covid-19, it is crucial to calculate the average total cost of building a house.

By multiplying the size of the desired house by the cost per square meter, customers can get an average estimate of the total cost. This approach prevents customers from receiving insufficient funds for their construction projects.

We work with agents who review house prices over time. Agents and market surveys help us identify overpriced and underpriced houses in the market. 

Customer education on the purpose of purchasing a house, such as for personal residence or rental purposes, is also considered. For rental properties, we advise customers on suitable areas to build houses so as to avoid unrealistic income expectations.

How are you championing the Government’s affordable housing agenda?

We are actively involved in providing mortgages for affordable houses. Also, we form financial partnerships with building owners or developers who focus on affordable housing projects.