To take or not to take mortgage?
May 17, 2008
THE construction industry has become a major driver of economic growth in the last 10 years. Everybody who is anyone is either building or buying property. In response to this development, commercial banks have jumped in with both feet to sate the demand for mortgage loans - loans taken out using pr
By Paul Busharizi
THE construction industry has become a major driver of economic growth in the last 10 years. Everybody who is anyone is either building or buying property.
In response to this development, commercial banks have jumped in with both feet to sate the demand for mortgage loans - loans taken out using property as security for durations of up to 20 years.
Mortgage rates, depending on which bank you use, range from 15 to 20% a year. In Uganda, banks require as a sign of your commitment, that you put down a minimum deposit on the house of anywhere between 10 and 30% and lend you the balance of house’s cost price.
So for example if the house is worth sh100m, the borrower would commit up to sh30m and the bank would loan him the rest.
A recent advert by a major developer sparked off debate among friends and family about the wisdom of taking out a mortgage.
The naysayers’ fears revolved around the total amount of money that a borrower would pay a bank at the end of the mortgage period and the fear that 20 years is a long time and were something to happen to the borrower during the period the bank would repossess his house regardless of what had been paid out.
However, the common omission in the detractors of mortgages argument was the appreciation of the value of the underlying property during the period and the benefit of the accumulated equity - through repayment and property appreciation the value of the property increases with time.
To illustrate, assuming a person identified a sh140m house to buy and the down payment required on the house was sh40m or 30% of the cost price, and the bank is willing to lend the prospective home owner the remaining sh100m at 17% over a period of 20 years.
When all the calculations have been done, the borrower will be paying the bank about sh1.47m a month for the next 20 years. This is where the red flags went up because over the duration of the mortgage, the borrower will pay the bank about sh353m in total.
On the surface of it, it boggles the mind that despite my sh40m down payment I have paid more than three times the cost of the house by the time I complete payment.
That often does it for most people, who then give up hope and go off to look for a plot. But on closer scrutiny, they will discover that whereas they seemed to have paid daylight-robbery-rates for their home, it is actually a good deal.
What seems like the nearly quadrupling of the price of the house over 20 years could be seen another way, that the house has gained in value at the rate of about 6.5% a year for 20 years!
All anecdotal evidence shows that property in a good or prospectively good area around Kampala does not appreciate at as little as 7% a year - that you buy a house this year at sh10m and earn less than sh1m when you sell it next year.
For the sake of argument, say the house appreciates at 10% a year for 20 years, your sh100m house will have appreciated to just under sh700m, more than double the total you have paid to the bank.
And this would get even better, assuming a fixed mortgage rate in an inflationary situation -- a not unlikely situation over the next 20 years. But that is not even half the story. Most banks allow people to refinance their houses after a certain period.
That means that after making several payments the bank is willing to lend the borrower against the accumulated equity in the house - the sum of new appreciation on the property and the money paid out so far.
Like a top-up on an unsecured loan. So many people borrow again, effectively extending their repayment period and use the money to buy another property.
The trick to make this all work for you of course is to make sure you buy the best value-for-money house - inexpensive, with good long-term prospects and get the lowest mortgage rate possible.
And what happens if something happens to you before you clear the loan?
Answer: What will happen to you if you don’t take the deal and nothing happens to you anyway?
pbusharizi@newvision.co.ug
THE construction industry has become a major driver of economic growth in the last 10 years. Everybody who is anyone is either building or buying property.
In response to this development, commercial banks have jumped in with both feet to sate the demand for mortgage loans - loans taken out using property as security for durations of up to 20 years.
Mortgage rates, depending on which bank you use, range from 15 to 20% a year. In Uganda, banks require as a sign of your commitment, that you put down a minimum deposit on the house of anywhere between 10 and 30% and lend you the balance of house’s cost price.
So for example if the house is worth sh100m, the borrower would commit up to sh30m and the bank would loan him the rest.
A recent advert by a major developer sparked off debate among friends and family about the wisdom of taking out a mortgage.
The naysayers’ fears revolved around the total amount of money that a borrower would pay a bank at the end of the mortgage period and the fear that 20 years is a long time and were something to happen to the borrower during the period the bank would repossess his house regardless of what had been paid out.
However, the common omission in the detractors of mortgages argument was the appreciation of the value of the underlying property during the period and the benefit of the accumulated equity - through repayment and property appreciation the value of the property increases with time.
To illustrate, assuming a person identified a sh140m house to buy and the down payment required on the house was sh40m or 30% of the cost price, and the bank is willing to lend the prospective home owner the remaining sh100m at 17% over a period of 20 years.
When all the calculations have been done, the borrower will be paying the bank about sh1.47m a month for the next 20 years. This is where the red flags went up because over the duration of the mortgage, the borrower will pay the bank about sh353m in total.
On the surface of it, it boggles the mind that despite my sh40m down payment I have paid more than three times the cost of the house by the time I complete payment.
That often does it for most people, who then give up hope and go off to look for a plot. But on closer scrutiny, they will discover that whereas they seemed to have paid daylight-robbery-rates for their home, it is actually a good deal.
What seems like the nearly quadrupling of the price of the house over 20 years could be seen another way, that the house has gained in value at the rate of about 6.5% a year for 20 years!
All anecdotal evidence shows that property in a good or prospectively good area around Kampala does not appreciate at as little as 7% a year - that you buy a house this year at sh10m and earn less than sh1m when you sell it next year.
For the sake of argument, say the house appreciates at 10% a year for 20 years, your sh100m house will have appreciated to just under sh700m, more than double the total you have paid to the bank.
And this would get even better, assuming a fixed mortgage rate in an inflationary situation -- a not unlikely situation over the next 20 years. But that is not even half the story. Most banks allow people to refinance their houses after a certain period.
That means that after making several payments the bank is willing to lend the borrower against the accumulated equity in the house - the sum of new appreciation on the property and the money paid out so far.
Like a top-up on an unsecured loan. So many people borrow again, effectively extending their repayment period and use the money to buy another property.
The trick to make this all work for you of course is to make sure you buy the best value-for-money house - inexpensive, with good long-term prospects and get the lowest mortgage rate possible.
And what happens if something happens to you before you clear the loan?
Answer: What will happen to you if you don’t take the deal and nothing happens to you anyway?
pbusharizi@newvision.co.ug