Rent doubles
in seven years, while mortgage remains constant
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
24 May 2009
One of the commonest
reasons why many people shy away from taking a mortgage to buy a house
is that the interest rates charged are deemed “too high”. This makes the
monthly installments “too expensive” thus many would-be home buyers
remain tenants for a very long time….sometimes, for life!
A major factor that
stops people from making the transition from renting to mortgaging is
that they usually want to buy a house that is bigger (and better) than
the one they are living in. For this reason, a person staying in a
one-million-shilling house would probably prefer to buy a sh2 million
one.
The justification
probably arises from the observation that, on average, the mortgage
installment for the house you are renting is approximately double the
rent you are paying.
Let me illustrate
with an example: Suppose you are paying sh20,000 rent in
Now if you were to
buy such a house, you would be required to put a deposit of, say, 10
percent (sh300,000) and then get mortgage financing for the balance
(sh2.7 million).
At present, banks are
charging between 13 and 15 percent interest so, if you borrow sh2.7
million at 14 percent for, say 10 years, you monthly installment will be
about sh42,000 per month. This is just slightly more than double the
sh20,000 rent you are currently paying.
Understandably then,
you might expect that for sh40,000 per month, you should get a house
that is at least twice as good. However, you forget that it will also
cost twice as much to buy – sh6 million, not sh3 million.
There is another side
of this assessment that is rarely thought about. The value of houses is
constantly increasing; therefore, rents are also rising steadily. So,
what will be your rent in, say, 10 years time?
If we allow a modest
10 percent per annum increase, it turns out that, in the year 2019, you
will be paying about sh50,000 in rent for the house that is costing you
sh20,000 today. Now, that is higher than the mortgage that you would be
paying if you opted to buy!
In fact, with that
rate of increment, your rent will touch sh40,000 in about seven years
time, that is, 2016. If you doubt me, consider this true example: in
2002, the average rent in one
Now consider this:
Those who opted to buy these houses in 2002 signed up for 15-year
mortgages where they pay installments of sh31,000 per month. Thus today,
the buyers who rented out their houses are able to pay the loans with
the rent collected!
So, if you are
wondering whether to take a mortgage or not, chose whether you want to
double your monthly housing cost now (and own the house later) or in
seven years time (and never own the house). Over to you…
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