As a new home buyer, with less finances to purchase a house and you opt for a mortgage. You’ll need to be aware of some aspects of the mortgage process to fully grasp the responsibilities that come with this type of financing.
Furthermore, using a mortgage as a source of financing for your home is not a day process. It takes time; which is why you need to put these considerations in mind before you even go to a lender.
What to keep in mind as a property buyer:
The Loan amount
Most Kenyan property buyers don’t realize that the financial responsibility surpasses the sale price of the property. Your mortgage will cater for the amount the bank is willing to lend you towards the purchase of the property.
Unless otherwise negotiated with the lender, the loan amount will not include closing costs such as legal fees(both the buyers and lenders), valuation costs, stamp duty, insurance and registration of the charge. To meet these costs, you will need to budget for approximately 10% of the full sale price and they will have to be catered for before payment of the loan. if these amounts are included in the loan advance to you. It’s important to note that you will pay more in interest charges over the life of the loan.
Take this example; to acquire a property of Kes 5,000,000 you would need to budget for approximately Kes 450,000 in other costs. If this included in the loan amount assuming a 20-year mortgage at 14% you will pay an additional Kes 893,000 just in interest costs for the initial borrowing of Kes 450,000. It’s therefore always better to have included these “closing costs” in your savings towards this property purchase.
The Down payment
As a borrower, you should evaluate your cash flow to weigh the impact of making a certain as a down payment on your liquidity situation. The higher the down payment the fewer expenses you incur on your mortgage.
Can you afford the monthly payments?
As a borrower, you should ensure that you can comfortably maintain the monthly payments. This without affecting other obligation such as school fees payments. However, remember that the smaller the monthly payments the higher the interest expenses over time. With investments property, you may benefit from rental income which can be used to service the repayments.
Loan to value ratio
This is the amount of the loan expressed as a percentage of the value of the property. If you were buying a property of Kes 10 million and the bank will give you 90% of this which is kes 9 million. Therefore, the loan to value ratio is 90%.
The Interest cost
Keep in mind the interest may be a fixed rate which is not a subject to change or maybe a variable rate which may vary usually in line with market interests rates. Moreover, with fixed rates, you will have the comfort of knowing that interest rates won’t go up. But neither will it go down even if interest rates fall. With variable rates, you won’t have the same level of comfort but you will benefit if market interest rates fall.
Importantly, note that some of the advertised fixed mortgage rates which tend to very attractive are not applicable for the entire duration of the loan but may only apply for a specified period like 5 years. The interest rate can, therefore, regress to as much higher rate when the period has lapsed. endure you understand what type of interest rate you will be paying and for how long.
Unfortunately, you may lose a job or source of income and therefore may be permanently or temporarily unable to fulfil the obligation to the lender. As a borrower, you will be in breach of the contractual obligation to repay the loan in the scheduled instalments. Hence, additional interest will automatically be charged on the amounts that are unpaid. However, if the default continues for a long period, the bank may call on the security which is selling your property to recover its money.
Moreover, it’s important to understand what the financier will consider as default and what action will they take.
Questions to consider:
- Will one late payment mean that auctioneers will be at your house or is it after several months that drastic action on their part will lead to this?
- Should you default; are there any late fees or penalty interest rates that will become payable on your loan?
This is the main controversial issues in mortgage agreements. A prepayment penalty is imposed if the borrower pays off the loan balance early. The purpose of a prepayment penalty is to compensate the lender because of the lost opportunity to earn interest and realise the profit on the loan.
As a borrower, you should ask if a mortgage agreement includes prepayment penalty and what period that this penalty would apply to. Furthermore, some financiers would impose penalties for only a certain period like if the mortgage is paid off within the first 5 yrs. This is because banks make most of their interest in the early years of a mortgage.
Foreclosure or repossession
The possibility that the lender has to foreclose, repossess or seize the property under circumstances where the borrower has defaulted.
The bottom line
Before approaching a lender have in mind all the above, it helps to make the process simpler and less time consuming. Research is always key.