A mortgage is a loan that is taken out from a bank to buy real estate. It is a loan that is ‘secured’ against the value of the desired asset until it is fully paid off. If the borrower does not manage the repayments in the agreed manner, the lender can repossess (take back) the asset and sell it, so they get their money back.
Development of Mortgage Finance
Kenya has a burgeoning mortgage market. The housing finance sector in the country has steadily expanded over the years to accommodate for the increasing population. Today, Kenyans are drawn towards economic centers that are situated in urban areas. This rural to urban migration has increased the demand for mortgage products and services.
Mortgages have therefore become more widespread and are offered by virtually all banks. Unfortunately, these same banks have been rated as the biggest obstacle to the mortgage market development due to stringent terms and conditions imposed during the application process.
Types of Mortgages
Mortgages in Kenya fall under two major categories, they are:
- Fixed rate mortgages: This type of mortgage guarantees a borrower will pay a fixed interest rate for the entire duration of the loan.
- Variable rate mortgages: Interest rates on these loans change as a result of changes to the economy, with equal payments made on the reducing balance.
What to Look Out For When Choosing A Mortgage?
- Choosing the lowest possible interest rate:- This is what banks charge the borrower for the use of the loan. The interest can either be variable or fixed depending on the type of mortgage.
- Penalties on prepaid amounts:- Certain banks will limit the prepayment of a portion or the entirety of the loan. If the borrower proceeds to pay the loan earlier than what was agreed, there are penalties imposed by the bank.
- Provisions for increased frequency in the amount of payments:- Some banks may allow a borrower the option to decrease or increase the loan balance, free of any penalties.
- Flexible loan period:- Bear in mind to choose an appropriate time that is suitable and convenient.
Importance of Mortgages
- Home Ownership: A mortgage enables you to own a home without paying the entire money upfront.
- Access to Additional Cash Flow: Having a mortgage can allow one to access a home equity loan. This gives the borrower access to additional funds which they can use of other purposes or during an emergency.
- Credit Rating: A borrower with a history of diligent mortgage payments maintains a high credit score with the bank. This means they can be considered for other products and enjoy even better interest rates.
For one to secure a mortgage, banks may require additional information about personal expenses, family upkeep and child maintenance. This is so as to evaluate the borrowers credit worthiness.
Failure to repay a mortgage results in a property being repossessed and eventually auctioned by the lender to recoup the losses. It is important to select the right mortgage type based on your financial capability.