I wrote the article “buying or building a house before age 40 is a mistake.” Click Here to read it. However, I think buying a house using the negotiated mortgage rates is a brilliant idea.
Let’s make some assumptions.
1. You work for the government or its affiliates, a bank or an “organized” company.
2. You have access to negotiated interest rates of 6% or less.
3. You qualify for the loans.
4. You are earning a net salary of Kshs 100,000.
5. That you don’t need to put in a down payment / deposit for the house.
6. The mortgage terms are such that you must buy a ready house.
If you take a 7 million shilling mortgage for 20 years at 6% pa on a reducing balance you will pay Kshs 50,150. Call it Kshs 50,000.
The Kshs 7 million will afford you a spacious modern design, 3brm master ensuite apartment in some select places eg Kinoo, Ruaka, lower kabete, upper kabete, some parts of Mombasa road etc where you will comfortably get a rent of Kshs 40,000.
This means that you will need to ” go back to your pocket” to pay an extra 10,000 per month. If you are working for any of the employers mentioned above, you will raise the extra Kshs 10,000 per month without a sweat. Think about the extra monies that you make every month in airtime allowance, overtime allowance, lunch allowance, night out allowance, mileage allowance etc. If you don’t have any of those, maybe you can reduce on your entertainment ( read, alcohol allowance) and raise the Kshs 10,000 without a stagger… Literally.
This means, after 20 years of being sober and someone else servicing your mortgage, you will own the apartment and your monthly income is still intact at Kshs 100,000 or more if you factor in annual salary increment and promotions. Therefore, you can continue with your life as normal and still take your kids to that school as you have always wanted.
If you don’t want to work for your employer for the 20 years, you can put in a larger amounts in monthly repayments since your income will be increasing as you get promoted and you can also use your end of year bonus to reduce the repayment duration.
Just like any other investment, this one has its risks.
If you don’t have a tenant for an extended duration, then you will pay the mortgage from your pocket. To counter this, ensure that you are responsive to your tenants requests and price the house competitively at all times.
In case you die or are permanently disabled, your mortgage will have an insurance component and your mortgage will be paid for in full.
In case you lose your job, you can use your accumulated pension contributions to pay off part of the mortgage as you “stabilize in your new state”. You can also opt to sell off the house, make your profit and use the money to start a business.
Even with such risks, I think this investment is worthwhile. Anyway, they say that majority of people die on beds, whether hospital beds or others… Will you start sleeping on a sofa to reduce the likelihood of death?
If this article is for you, you know what to do and remember. Opportunity favors the prepared mind.