By Paul Busharizi
To save or to borrow to build, that is the question?” to paraphrase William Shakespeare. The question pops up with thoughts of owning a home, oftentimes a few years into ones working life. What puts off the decision to start building is the issue of funds or a lack of thereof.
Using industry standards it costs about $500 or sh1.3m per square metre to complete a house. So for instance if you fi t your design in 100m2 or a ten-by-ten metre house expect it to cost around sh130m to construct to completion.
A good contractor or builder would be able to advice on how to minimise on those costs, but the formula serves as a good indicator of what to expect. Faced with these daunting figures the dilemma of how to raise the money – legally, raises more than a little concern.
The intuitive thing and what many builders do is to save a lump sum, kick off the project and hope to complete the build using regular monthly contributions from income.
Some don’t even bother with saving up the lump sum. In our society the counter intuitive thing is to borrow the money and build the house or even more radical borrow the money and buy a house. But this latter route is a person’s best option for several reasons.
To begin with the whole process of building is quickened. This is important because the costs of material and labour are more often than not increasing. A million shillings today will buy more cement than it will a year from now.
As it is now with the various credit products one can borrow as much as a whole year’s salary on January 1st to be repaid over three to six years for salary loans and longer if one took out a mortgage. How long would it take one to save one year’s salary. In addition the lump sum of money which comes from borrowing means you can plan better.
There are certain parts of the build that should be done at a go -- laying the foundation or setting the ring beam or even roofing, to do these piecemeal with long gaps in between can compromise the integrity of the building in the long run, it therefore helps to have a lump sum for these.
However when borrowing one has got to be clear to what use the property will be put to. If it is for personal use, to use as accommodation where the only return on investment one is hopping for is the psychological satisfaction of living in one’s house, avoiding the regular interaction with the landlord, then any loan product, the cheaper the better is okay.
As long as property prices continue to rise and there is no expectation of selling or renting the property in the immediate future, one can expect a better than average return over the long run. If one is borrowing to build a commercial property the easy route would be to build for sale, but because of our high lending rates higher than usual attention to costs will be critical to make the project profitable.
Take the above mentioned example of a 100 m2 which we worked out would come to sh130m without the cost of the land. So assuming a quarter acre of land costs sh30m that could mean sh160m as the final cost of the house give or take a few millions.
Assuming a mortgage for 80% of the cost of construction – I am assuming you saved and bought the land, the bank would lend you about sh100m for maybe 10 years. If you did not fi nd a buyer in six months you would have accumulated an additional sh10m in interest payments, one year down the road this would have ballooned to sh17m, 18 months this would have escalated sh25m and so on, thinning your profits. There is only so much you can sell a house for.
The numbers get even dire if you contemplate renting. Sticking with the sh100m mortgage you will be paying the bank sh1.4m a month a sum you are unlikely to get in monthly rent. On paper, however, your property can very well be appreciating, but it’s unlikely that even these gains will match the bank payments.
Businesses collapse for lack of cash flow to meet obligations not necessarily because the business is not gaining in value. So to borrow or to save to build? While saving looks the easier option mentally it is also takes too much time, time one cannot afford with the rising costs of things.
Borrowing is the better option, as long as one is clear about the numbers and does not overstretch their ambitions like building a very big house and the monthly loan repayments bury them.
Do you have a contrary view to this article Email: homes@ newvision.co.ug