As the New Year approaches, many people will be jotting down resolutions in a bid to transform their lives for the better. If you are tired of dealing with cantankerous landlords and paying rent, owning your own home in the near future has perhaps made it near the top of your resolution for 2017.
“It should make a lot of sense that those in the middle class in Kenya are rushing to either build or buy their own homes as instead of renting,” says Ms Joy Kagika, a personal finance coach and real estate tax consultant based in Thika.
She says when you pay rent, the money only lines the pockets of your landlord, while you have nothing to show for it come the beginning of the next month.
“If one were to commit the money they pay as rent to building a home or repaying a mortgage, they would save more money in the long run as they would be buying a solid, long-term investment for the future,” she adds.
“The value of a home always appreciates, and the appreciation rates are bound to continue being usurious for the next couple of years in Kenya,” she asserts while assuaging fears of an eminent burst of the country’s perceived real estate bubble. “If one were to take a bank loan to build a house today, the price of that house would be several times higher by the time they finish repaying the loan. The individual can then choose to put the house back on the market, cash in their profit, and get another loan to develop another house.”
Ms Kagika says that apart from financial gains, there are many reasons why owning a home makes so many people happy. She says communities usually develop more as the number of people owning homes in an area rises. As home owners develop interpersonal relationships with their neighbours, they invest more in the community and thus campaign for reliable support systems such as access roads, parks and better security in the neighbourhood.
If you’ve been looking to boost your self-esteem, then owning a home by the end of 2017 will go a long way in elevating your personal image. Ms Kagika says: “In many instances I advise couples on financial issues for several years. I have noticed that once a couple has acquired a place to call home, their sense of pride increases, making them more confident and ready to take on investments that they would have previously considered too risky.”
“Besides, when you finally put your name on that title deed, you have something that you can pass on to your kids as inheritance,” the finance adviser says.
However, do not expect saying goodbye to your landlord to be a walk in the park. Owning a home is a decision that will see you and your family make a lot of sacrifices along the way. Buying or building your home often turns out to be the biggest financial decision that many people make in their lifetimes. You will need to think about aspects such as how to raise the necessary capital, whether to buy or build, and the location of your home.
Even if you can get money and afford to buy a large house, can you really afford to keep it in the long run? Budget for house maintenance costs such as repairs, furniture, insurance, security and land rates.
“I have learnt that the biggest cause of arguments between couples is often about how money is handled. So, when deciding how to contribute to your shared dream of owning a home, each one of you should be ready to compromise for the sake of harmony,” she says.
While sorting out your finances, take a good look at your combined debt and look for ways of reducing, if not or eliminating them altogether. Ensure that you begin on a solid financial foundation by settlling all your debts such as previous car loans and study loans. This, Ms Kagika points out, will go a long way in improving your credit score should you require financing to build or buy your home.
“Potential home buyers and mortgage seekers should understand how lenders access their credit history,” says Ms Kagika. “Banks in Kenya always consult with credit reference bureaus to assess an individual’s credit history before deciding whether to give them a loan or not. Your credit record also plays a big part in determining the amount of interest you pay on the credit advanced.”
Notably, this year the President signed into law a constitutional amendment that places a limit on how much interest banks can charge on loans. Because of this, Ms Kagika predicts that as we go into 2017, many Kenyans will seek to finance their home ownership through mortgages, which had all along been unaffordable due to the high interest rates.
“Expect a lot of competition from banks as they try to undercut each other in providing attractive home financing packages. Borrowing to buy or build a house will be seen by banks as a much safer investment than borrowing for a start-up business or to buy a car,” she says.
Meanwhile, Mr Eliud Kipkorir, a real estate valuer with Daima Prime Management Agencies in Nakuru, advises those who opt for the mortgage route to use the freely available online mortgage calculators to estimate how much they can borrow, and what the repayments are likely to be.
While shopping around for a mortgage provider, Mr Kipkorir says, it is not advisable to approach the banks directly. Instead, he suggests that one should approach property valuers who act as mortgage brokers.
“When you walk into one bank and apply for a mortgage, it puts you at a disadvantage because you will not be able to compare their terms with other lenders. However, when you approach a broker, you are guaranteed access to a number of lenders. Mortgage brokers will not only ensure that you get the best deals, but will also give you a lender that tailors their product to your specific needs,” he offers.
However, Ms Kagika strongly cautions against this approach, instead suggesting that potential home-owners visit different banks and compare the offers on their own without involving property agents, who act as mortgage brokers. She argues thatsince brokers usually get a commission when they refer their clients to certain banks, some brokers might send their clients to lenders offering unfavourable terms but who give them generous commissions.
Both professionals, however, agree that before approaching the lenders, you should have saved at least 20 per cent of the total value of your intended home; this is the money that you will use to pay the deposit.
“Mortgage seekers should know that the smaller the down payment they make, the higher the interest they will pay in the long run,” notes Ms Kagika.
What if you want to own a home in 2017 but do not qualify for a mortgage and you don’t have enough money to buy your home cash? Is building or buying a home with little or no money of your own really possible?
Mr Eliud Kipkorir, a valuer, believes it is , as long as you are prepared to get a little creative in your financing.
OTHER PEOPLE’S MONEY
“People have always found ways to invest in real estate with little or no money of their own. They have achieved this by leveraging other people’s capital and have managed to turn handsome profits. I believe an aspiring home owner can use the same methods to put up their own home,” he says.
One such option, Mr Kipkorir says, is seller financing. So, instead of approaching a bank for financing, you can hold discussions with the property seller, after which the two of you can sign an agreement that enables you to acquire the property but on the understanding that you will pay for it later. You can legally agree on favourable interest rates, flexible repayment schedules and the possible consequences in case you default.
“Many individual sellers will be open to this option, especially if you convince them that they can make more money this way,” says Mr Kipkorir.
You can also approach a home seller and ask for a “lease option.” A lease option, Mr Kipkorir expains, can see you move into your house in 2017 even if you intend to pay for it much later at the current market prices. What happens is that the seller signs a document that grants you the option of buying the house in future. Meanwhile, you pay rent to the seller until you can afford to buy the house, and the owner cannot sell the property to anyone else during this period.
If you already own land in a prime area but do not have enough funds, Mr Kipkorir says, you can partner with an investor to provide the money for building your home in exchange for a stake in your land.
To make the offer more appealing, you can build a multi-family unit on the same piece of land so that you occupy one of the units and rent out the others. Rental income from the additional units can then go towards repaying the investors.
Do you know a friend who is struggling to pay their mortgage and is probably facing eminent fore-losure? If it is clear that they are about to lose their house, you can ask them to transfer their mortgage to you, thus effectively transferring its ownership.
Whether buying or building, one should pay attention to the location. You should always get the least expensive home in the best location if you intend to sell the house in future. GRAPHIC | NATION
Planning your home
The first step is budgeting for your home, and I usually advise couples to do this together. Sit down with your significant other and track your day-to-day expenses, noting the amount of money that you can save each month by eliminating unnecessary expenditure.
Compare your incomes and decide how much each of you should save towards your housing project. In this regard, you might discuss options such as taking the kids to a cheaper school or selling one of your cars. You should not be so frugal in your budgeting that you forget to put aside money for a rainy day and other expenses such as holidays,” says Ms Joy Kagika, a personal finance coach.
In your financial planning, it pays to over-estimate the costs in order to avoid surprises later on. Ms Kagika says that once you finish drawing up your budget, you should inflate the total by 15 per cent to cater for unexpected expenses. This can also offer you a financial cushion if the building costs or mortgage interest rates end up higher than originally estimated.
To buy or to build?
That’s the million dollar question that home-seekers constantly mull over. If you find yourself in such a situation Mr Eliud Kipkorir suggests a third option: get a reputable construction company to build the home for you. That way, you can avoid the hassle of having to deal with managing the construction and still have the house designed and built to your specifications.
If you choose to buy a home, be careful not to use your heart rather than your head and, therefore, buy a house simply because you like it.
“Some home-buyers fall in love with a property and disregard other factors such as location, only to find out when it is too late that the property is hard to resell,” he says. “Always consult with professional valuers to understand the true value of a property and avoid overpaying for the home.”
Whether buying or building, one should pay attention to the location; Mr Kipkorir says that you should always get the least expensive home in the best location if you intend to sell the house in future.
Ms Kagika adds that before you settle in an area, you should familiarise yourself with the neighbourhood.
“Spend time driving or walking about the area and ask the neighbours questions regarding the level of security, access to educational institutions and churches, drainage facilities, etc. Keep in mind that it is not only the home that you are purchasing, but the neighbourhood as well,” she advises.