7 Things to consider before taking out a mortgage facility
For a lot of people, owning a home is a lifelong dream; something we equate with stability and security. However, most of us don’t have the millions of shillings we need to buy a home just lying about. Enter, mortgage.
The concept of a mortgage gives rise to mixed emotions in most. It’s a loan that lasts for what feels like the rest of our lives, and costs us an arm and a leg in interest. To add further dread to our feelings about it, the word originates from the Old French word “mortgage”, which literally translates to “death pledge” (mort=death and gage=pledge). Terrifying.
I used to be a Mortgage Compliance Manager in one of the largest banks in Kenya, and I got to see the good, the bad and the ugly of all things mortgage. Taking out a mortgage isn’t as scary as we think, though. Sure, there are some definite downsides to long-term borrowing, but in when you think about, this is the only realistic option available to most of us if we want to purchase a home. I will go into the pros and cons of having a mortgage in a separate article, but for now, let’s get into what you need to consider before taking a mortgage.
Taking out a mortgage is a major life decision. It is a major commitment with long-term ramifications and responsibilities. It is also a great feat that gives you a sense of accomplishment – the height of “adulting”. If you have begun to think about approaching your bank for a mortgage facility, here are some practical things you need to keep in mind:
- How much can you afford to take out as a mortgage?
A good place to start in deciding the amount of mortgage you can take out (and hence within what price-range you should be looking for a house), is by working backwards from the monthly repayment you can afford to pay.
It is recommended that your mortgage repayment should not be more than 28% of your after-tax salary. So, for instance, if your post-tax income is Kshs. 250,000.00 per month, you should ideally not be paying more than Kshs. 70,000.00 towards mortgage. You can then ask your bank (or use an online calculator to calculate) how much mortgage you can get at this repayment amount. If you are planning to take a joint mortgage with your partner, it definitely means you can afford a larger facility as you will be considering your joint incomes.
- What other debt do you have?
Mortgage providers always consider your debt-to-income ratio when trying to determine whether you qualify for a facility. The recommended maximum amount of your after-tax salary that should be going towards all your debt is 36%. Note that this percentage is supposed to be inclusive of your mortgage repayment. This implies that prior to your mortgage, you should have minimal debt. Using the example of a post-tax income of Kshs, 250,000.00, your total repayments towards debt should be less than Kshs. 90,000.00. This means that all your other debt repayments need to add up to less than Kshs. 20,000.00 if you are taking out a mortgage with a repayment of Kshs. 70,0000.00.
Some mortgage providers may allow a slightly higher debt-to-income ratio (the highest I’ve heard of is 43%), but at this level of borrowing, you are likely to struggle with your finances and will be able to do little else.
- Can you afford the down payment?
Mortgage providers often require you to pay for 10-20% of the house purchase price as a show of your commitment towards the project. Although nowadays several providers offer over 100% mortgage financing (Sometimes up to 105% to enable you pay for some of the closing costs associated with home purchase), you need to keep in mind that the more you borrow the more interest you will eventually pay. It would be prudent for you to save up the down payment amount prior to applying for a facility. This will also assist you closing a sale faster if you are able to pay the seller a deposit when signing the sale agreement.
- Are you aware the related purchase closing fees?
Buying a home has a lot of auxiliary costs attached such as legal fees, valuation fees, Stamp duty, loan processing fees etc. Though some mortgage providers will lend you inclusive of these amounts, it would be more prudent to pay these fees out of pocket to reduce your debt-load. Ask your provider to give you a list of the associated costs so that you may prepare financially and mentally prior to beginning the process.
- What costs may you expect to incur post-purchase?
You need to ensure you are prepared for some of the costs that may be associated with home ownership. Some of these costs may already be included in your mortgage repayments (such as homeowners insurance to cover your property from damage) but others may be specific to your purchase. For instance, is there a monthly service charge you will be required to pay for the property you are purchasing? Ensure that whatever additional costs you will incur after purchase, you will be prepared for it.
- Are you able to meet your banks mortgage requirements?
Different mortgage providers have different requirements, so you need to find out from your bank what they would require from you. Are these things you are able to provide? Some common mortgage requirements include:
· At a least 3 latest months’ Pay-slips
· Letter from employer confirming employment status
· Bank statements
· Copy of ID and PIN Certificate
· Copy of agreement for sale or offer letter from seller
· Copy of title
You also need to be aware that most mortgage providers have a minimum income that they can accept for consideration of extending a mortgage facility to.
- Are you emotionally prepared to buy a home?
One of the reasons home-ownership is associated with “settling down” is the level of long-term responsibility it requires. Other than marriage, a mortgage is one of the longest contracts any of us will ever be in. Are you ready for this level of commitment? If you’ve read this article to this point, it’s safe for me to guess that the answer is probably yes.
Buying a home is something a lot of us desire deeply, but are also deathly afraid to do. It is definitely life changing. One of the first thing it does, is immediately give you a chance to grow your net worth. The beauty of home ownership is, as your mortgage is reducing, the value of the property is generally always increasing. I consider home ownership a cheat code for achieving lasting long-term wealth. Are you ready to take the plunge?
Next, I will write an article outlining the pros and cons of taking a mortgage. Spoiler alert, the pros outweigh the cons.
If you’d like to take the first step and have a discussion with me about your finances, book a free 30-minute ZOOM Financial Discovery call HERE.