No! You cannot pay off mortgage with rent collected from house

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

07 May 2023

Wanjiru Maina ask a straightforward question: “Can I borrow money to buy a house for renting and use the rent to pay back the loan?” The straight answer is no. The loan repayments are too high. If you too a loan of, say Sh5 million at 15 per cent for 20 years and used the money to buy a house (probably in the outskirts of Nairobi), the monthly instalment will be about Sh66,000 per month.

Is it reasonable to expect that much rent for such a house? The highest you can get is around Sh30,000 monthly and so, you would need to raise Sh36,000 from your pocket. Alternatively, you may take a loan for a part of the purchase price and raise the rest from savings.

In that case, you need to ask yourself what amount of loan (at 15 per cent for 20 years) would be repaid with Sh30,000. The answer is about Sh2,280,000. But, to be on the safe side, you should round this down to Sh2 million, meaning you have to get Sh3 million from savings.

The monthly instalments for a Sh2 million loan will be Sh26,335. This gives you some breathing space to take care of those months when you have no tenant; or if the interest rate is varied upwards.

However, even though the calculated instalment is Sh26,335, it would be wise to pay the full Sh30,000 to the lender collected from rent. This is the only way you can reap the benefit of the breathing space. If everything remains constant – you don’t lose your tenant and the bank maintains the interest rate – you will significantly cut down the repayment period. From 20 years to just 12!

Yes; a 14 per cent increment in the repayment amount will cut down the duration of the loan by 40 per cent. The reason for this is that, the little extra money paid (Sh3,665) reduces principal amount owed to the bank.

An interesting question is: at what level of interest rate would it be possible to pay the full instalment of for Sh5 million with the rent. In other words, for a 20-year, Sh5 million loan, what interest rate would make the monthly payment Sh 30,000?

The answer is about 3.85 per cent. This is just too low – only available in a few countries around the world. The alternative is an increase in the duration of the loan from 20 to, say 30 years. The corresponding interest rate comes to about 6 per cent – still too low for the Kenyan market.