Home ownership is a major deal for most people in Kenya. Owning a home or property is seen as the hallmark of financial achievement.

You may be a multimillionaire, but you’ll never be regarded as having made it if you don’t own a home. The high accord with which home ownership is regarded has also spurred the growth of mortgages.

This growth has in return netted tens of thousands of Kenyans. Paying off your mortgage is not as easy as filling your mortgage application documents.

That bright smile of the credit officer can change into a face of threat within the spur of one monthly default. Which raises the question: is taking a mortgage really worth it in Kenya?

Current mortgage cost estimates

According to George Mangs, an investment expert and the founder of investment firm MarketCap, it is miles better to just rent away as opposed to taking a mortgage when you look at it from the cost of capital.

“Mortgages in Kenya are currently averaging at about 11 to 13 per cent. If you take a mortgage for a period of 15 years, you will end up spending so much a colossal sum on a house, and thereby deny yourself a chance to create a solid capital base,” he says.

“The capital base you spend on an expensive mortgage could be invested in other vehicles with better returns that could have otherwise been invested for better returns that could enable you to acquire a similar or even better house and still be able to keep change without ever sliding into multi-million debt.”

A spot check on the Absa Bank Kenya’s home calculator shows that if you get a mortgage for a house worth Sh. 4 million at an interest rate of 11.9 per cent for a period of 25 years, and you make the minimum deposit of Sh. 400,000, you will be paying Sh. 46,017 per month.

Your total repayment for the loan will be Sh. 13,805,119. Out of this, the total interest you will pay the bank will be Sh. 9,805,119. Stamp duty, legal fees, valuation and insurance will consume a total of Sh. 241,000. If the same loan is taken for a period of 5 years, your total repayment will be Sh. 5,859,202.

Out of this, the total interest paid will be nearly Sh. 2 million, at Sh. 1,859,202. According to the Kenya Bankers Association’s Cost of Credit tool, the same mortgage loan at an interest rate of 13 per cent at the Kenya Commercial Bank would incur total interest of Sh. 8,580,621.

The total amount you will be Sh. 14,197,777. At Equity Bank, you would pay the same total of interest as at KCB. However, the total amount you’d pay would be Sh. 12,982,560 at an interest rate of 13 per cent.

The alternatives

There are several alternatives to taking a mortgage that favour renting.

According to Mangs, a Sh. 15 million house mortgaged out at the current rates will attract monthly payments of between Sh. 190,000 and Sh. 210,000 monthly depending on where you get the mortgage from.

“That is a house that collects about Sh. 75,000 in rent monthly, which is equivalent to about 0.5 per cent of the cost of the house,” he says.

“If you are to rent that house and invest the difference of about Sh. 135,000 in a safe asset like a government bond, you will have cash flow, no debt, not to mention the liquidity factor. The mortgaged ‘house owner’ doesn’t have these privileges beside the psychological benefits of ‘owning a home’,” he says.

Mangs adds that in the end, your home may appreciate in value at 10 per cent per annum (which will be inclusive of 5 per cent inflation, and 5 per cent real interest) since it’s an asset.

“After 15 years, it will be worth around Sh. 38 million. Your Sh. 135,000 government paper investment at 0.8 per cent per month (or 9.6 per cent per year) will translate to around Sh. 54 million at the end of 15 years. This means that you would still be able to buy the house at Sh. 38 million and still have an extra Sh. 12 million in your pocket,” he says.

Location and changing needs

Acquiring a house may also be more of a sentimental investment. “It is easy to be trapped into debt to satisfy your psychological need to have the feeling of home ownership, to be categorized as a homeowner,” says social psychologist Raphael Odaya.

However, beyond the sentimental satisfaction of owning a home, your house may not repay the amount of money you spent on it, especially if the capital was sourced from an expensive mortgage.

At the same time, your home ownership priorities today might change by the time you’re done paying off your mortgage. Such a change may be compounded by age and retirement.

“If you take a 15-year apartment mortgage at age 45 years in Nairobi, you may find that you no longer want to live in an apartment at age 60 when the mortgage matures, and instead want to relocate upcountry or want to settle in a bungalow in the outskirts of Nairobi,” says Odaya.

If you had not taken the mortgage and instead put your money in a government bond earning you the same interest of about 11 to 13 per cent, you will not only have sufficient capital to put up a retirement home, but also have liquidity to sustain you in retirement.

At the same time, you must consider your income and what you want to achieve during your most productive years, and whether the mortgage you want to take will allow you.

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According to Mangs, any potential home owner interested in going the mortgage route must first look at their financial position and be sure that the monthly payments are not going to put much dent on their cash flows.

“This will give you financial legroom to navigate through any investment opportunities that may come knocking. Because the reality of mortgages is that they are extremely financially binding contracts,” he says.

“They leave you so financially incapacitated that if not thought out well, you may end up owning a house but nothing else. This is because you forfeit your capital during your productive years on nothing but the house.”

Kenya Mortgage Refinance program

This is a State agency program which offers cash to banks and saccos for onward lending to aspiring homeowners. This lending is given at an annual interest rate of 5 per cent.

The banks and saccos who get this cash are supposed to lend it out at a single digit interest rate which is lower than the average mortgage market rate of 12.06 per cent.

This program gives loans to workers who make less than Sh. 150,000. Loans from KMRC are capped at Sh. 4 million for Kenyans living in the Nairobi metropolitan area who want to acquire property in this area.

Kenyans living outside this area who also want property get a maximum of Sh. 3 million in loan. These loan amounts come with a repayment period of up to 20 years.

By March 2021, the Kenya Mortgage Refinance Company low cost housing program which is backed up by the government had advanced Sh. 2.8 billion to local banks for onward lending to aspiring homeowners.

According to Mangs, this might be a saving grace as it will allow more people to access home credit at more affordable rates of about 7 per cent than is currently the norm.

Quick Takeaway

How Kenya’s 13 per cent mortgage rate compares with some other countries:

• United States mortgage rate: 2.6 per cent
• United Kingdom mortgage rate: 3 per cent
• Canada mortgage rate: 2.5 per cent
• South Africa rate: 7 per cent
• Brazil rate: Between 5 and 7 per cent

According to Mangs, this comparison means that taking a mortgage in our country will badly dent your growth potential as an individual.

This feature was first published in the Saturday Magazine. The Saturday Magazine is a publication of the Nation Media Group.