At some point in life, almost everyone dreams of being a homeowner. In one way or another, most people dream about slowly transiting from being renters to homeowners.
It is way better, however, to rent a house as opposed to taking a mortgage from commercial banks, this is in line with the capital cost perspective.
"With mortgage you will spend so much on a house and deny yourself a chance to create a solid capital base," says Racheal Radul, an economic analyst at one of Kenya's Credit Reference Bureaus (CRBs).
In the case of one of Kenya's commercial banks, Ksh4 million mortgage with an interest rate of 11 percent for a period of 25 years, one is required to deposit Ksh400,000 to qualify, meaning you will be paying Ksh46,000 per month.
Your total repayment for the loan will be Ksh13.8 million. Out of this, the total interest you will pay the bank will be Ksh9.8 million.
"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 and could enable you acquire a similar or even better house and still be able to keep change without ever sliding into multi-billion debt," Radul noted.
Stamp duty, legal fees, valuation and insurance will consume a total of Ksh241,000. If the same loan is taken for a period of five years, your total repayment will be Ksh5.8 million.
A Ksh15 million mortgage at a different lender attracts Ksh210,000 deposit to qualify. If you pay Ksh75,000 monthly rent for the same house for 25 years, you would save Ksh135,000 every month.
"If you are to rent that house and invest the difference of Ksh135,000 in a safe asset like government securities, you will have cash flow, no debt, not to mention liquidity factor. Mortgage house owner does not have these privileges besides the psychological benefits of owning a home."
Investing in government securities with similar amount, you would earn about 11 to 13 percent and have sufficient capital to put up a retirement home.
For affordable mortgages, however, the National Treasury has a Kenya Mortgage Refinance Company (KMRC) which lends at an annual interest rate of five percent.
Banks and SACCOs that get funding from KMRC are required to lend it out at a single digit interest rate, which is lower than average mortgage market rate of 12 percent.
The programme gives loans to workers who make less than Ksh150,000. Loans from KMRC are capped at Ksh4 million for Kenyans living in Nairobi Metropolitan area. Those living outside metropolitan get a maximum of Ksh3 million in loan with a repayment plan of up to 20 years.
Kenya has one of the most expensive mortgage rates compared to developed economies globally.
The US, for example, offers a repayment plan at a 2.6 percent rate, UK offers 3 percent, Canada (2.5 percent), South Africa (7 percent) and Brazil (5 percent).
