Finding the money to pay for your dream home can be just as challenging as finding the home itself. Not that you have to look in too many places: the rules that control institutions [in Kenya] providing financial services have traditionally imposed an unnecessarily strict system that specifies which institutions can provide which types of products to which customers. Until recently, commercial banks were to get them through the construction phase. Mortgage companies and building societies then provided long-term mortgage loans to individuals to purchase houses from developers, or less commonly, to build their own complete home. Discerning buyers looking to get away from the housing estates and purchase a property of appreciable value will be glad to see the entry of commercial banks into the mortgage lending business. While first-time buyers are now spoilt for choice, the basics of hunting for a house loan remain much the same as they always have.
The first step should be figuring out how much you can afford to spend. Several factors go into this decision: your income, your other debts and your anticipated lifestyle during the life of the mortgage. Lenders need to know that you will have the income to pay back the loan, so the mortgage period usually cannot run into retirement (or past your 60th birthday). If you are planning a big family or hope to travel more in later years, you may not want to saddle yourself with too large a loan. Personal finance experts recommend that you do not borrow more that two and a half times your annual gross income when applying for a mortgage. Some institutions have no limits or will lend up to three times your annual income, but taking such a large mortgage increases the chances of defaulting.
Apart from the size of the mortgage, the full cost and term of the loan are the two other facets to consider carefully. Cost will be determined by the interest rate over the term of the loan as well as other fees that are required. There are two basic types of mortgages: Fixed rate mortgages and Variable/Adjustable rate mortgages.
On a fixed-rate mortgage, you will owe a certain percentage of the loan as interest to the lender. This amount never changes, and your monthly payment will remain the same over the life of your loan. The interest rate on a variable/adjustable-rate mortgage changes to reflect changes in the credit market, with equal payments (at the prescribed rate) being made on a reducing balance. This is the most common type of mortgage available. Exotic variations include mortgages with a teaser rate, where the first- year rate is a couple of percentage points below the market rate (such as the Kenya Housing Society facility), and others with discounted rates for borrowers who make prompt payments over a period of time (à la Housing Finance). There are also some with upward limits, above which the interest rate isn’t allowed to go.