Here is how you can buy the house you are renting – in cash

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

23 September 2007

Last week’s article got many people thinking about their housing. C. N. Ng'ang'a writes, “It is evident that most of us are already paying the maximum towards housing in the form of rent and [can’t] afford [to buy] the same house. How is the alternative of paying rent for 5-9 years, then saving (and investing) the difference between the rent and mortgage? Can one then [afford to] buy the house in cash?”

We can use last week’s figures to answer the question. It turned out that if you are paying Sh6,000 in rent, then the house you are leaving in is worth about Sh900,000. The mortgage for it would cost you about Sh12,800 per month for 15 years at 15 percent interest.

Now Ng’ang’a is suggesting that one saves Sh6,800 (12,800 – 6,000) every month for 5 to 9 years (average = 7 years). This amounts to a total contribution of Sh571,200 into the savings account in seven years. Since we haven’t added any interest, that figure sounds encouraging…

If you get a competitive interest rate of 6 percent per year, the balance in the savings account will be Sh897,956. Now this is even more encouraging. It appears that you will only need to add some pocket change (Sh2,044!) to buy the house in cash. Or can you? Not quite…

The above calculation has ignored capital appreciation – that is, the gradual increase in the market value of house with time. Now, in the last five years, the value of houses has been increasing by about 10 percent annually. Assuming that this will remain for the next seven years, it turns out that the house will be worth about Sh 1.75 million. You won’t afford it with your Sh900,000!

To raise Sh1.75 million you would need to save about Sh13,250 per month for seven years. Alternatively, you would need to look for an investment avenue that yields better returns than the 6 percent per annum. How much better…?

If you can only save Sh6,800 per month and your target is Sh1.75 million in the next seven years, then you will need to look for an investment that yields about 27 percent per year. Now that rate is attainable, but it is almost the highest that reliable schemes (e.g., unit trusts) can achieve.

Finally, I have received many questions from readers regarding their mortgages. Like, if I can afford x-amount, how much can I qualify for? Or, I have been paying religiously for the last 6 years, what is my balance now? Or, if I want to clear the mortgage in the next 3 years, how much extra should I pay? And so on.

If you have such a question, send me the relevant details via the email below and I will work out the figures for you confidentially (I will not publish them in the paper or reveal them to anyone else).