The gap between income and home values has grown at an astounding rate, making it hard for a majority of Kenyans to own homes.
Have you been thinking of taking a mortgage?
”They make it possible for people to buy homes without having to pay the full price,” she says.
Second, Ms Kihara says homes can appreciate over time, providing homeowners with a long-term investment. Mortgages also provide financial stability, particularly with fixed-rate loans, where borrowers know exactly how much they must pay monthly.
Additionally, depending on local regulations, mortgage interest payments can be tax-deductible, offering homeowners significant tax benefits.
First-time homebuyer
However, if you are a first-time homebuyer, there are various factors that prospective homeowners should consider.
According to Ms Kihara, one of the most critical factors is the credit score. A good credit score shows lenders that you are responsible with money and increases the likelihood of being approved for a mortgage.
“Check your credit for any errors, pay down existing debts, and aim to improve your credit score before applying for a mortgage,” she explains.
It is also important to consider the debt-to-income ratio, paying down existing debt before applying for a mortgage increases the chances of approval. Moreover, researching different mortgage types and working with a mortgage adviser can help buyers find a loan that fits their financial situation.
Ms Kihara also says buyers should get pre-approved for a loan before looking at homes.
“Pre-approval not only gives you a clear budget but also makes you a more attractive buyer in competitive markets,” she says.
“Monitor current mortgage rates and consider locking in a rate if you believe rates may rise before you purchase a home. Be mindful of the budget for these additional upfront costs and ask the lender for a breakdown of closing fees.”
Despite the appeal of homeownership, it is easy to make mistakes during the mortgage process, especially for first-time buyers.
“One of the most common mistakes is not checking your credit score early enough,” says Ms Kihara.
Not knowing your credit score in advance can lead to unwelcome surprises during the application process. Another pitfall, she warns, is ignoring the full cost of homeownership.
Failing to shop around for competitive mortgage rates can also be costly.
Ms Kihara advises prospective buyers to compare offers from different lenders because even a small difference in interest rates can translate to significant savings over the life of the loan.
Skipping the pre-approval process or making significant financial changes, such as changing jobs or taking on new debt, before the mortgage is finalised can jeopardise the entire process.
Choosing between fixed-rate and variable-rate mortgages
One of the most important decisions for homebuyers is whether to choose a fixed or a variable-rate mortgage.
According to Ms Kihara, this choice depends on several factors, including long-term financial goals, market outlook, and risk tolerance.
A fixed-rate mortgage offers the security of predictable payments, as the interest rate remains constant over the life of the loan.
“Fixed-rate mortgages are ideal for individuals who want stability, especially in times of fluctuating interest rates,” she says. This type of mortgage is well-suited for long-term homeowners or those who prefer a conservative approach to their finances.
A variable-rate mortgage, an adjustable-rate mortgage, or ARM, can be more flexible, offering lower initial rates that may adjust over time.
This option is appealing to homebuyers who plan to move or sell their home before the interest rates start fluctuating. Kihara advises, “If you expect your income to increase or are only planning to stay in your home for a few years, a variable-rate mortgage can make sense.”
How much income should you allocate to a mortgage?
One of the primary questions prospective homeowners ask is how much of their income should be allocated to mortgage payments. Ms Kihara pinpoints the importance of adhering to the “one-third rule”.
“This rule suggests that no more than two-thirds of your basic monthly income should be allocated to all costs, including mortgage payments, property taxes, insurance, and other related costs. This percentage helps prevent financial strain while allowing for other expenses and savings.”
Rates, Ms Kihara says, are influenced by several factors, including economic conditions, central bank policies, the bond market, and competition among lenders. “When inflation is high, mortgage rates tend to rise because lenders need to maintain their profit margins. Conversely, lower inflation can result in more favourable rates for homebuyers,” she says.
In addition to economic factors, an individual’s credit score, the size of their down payment, and the type and duration of the loan also affect the mortgage rate they receive. The mortgage expert encourages buyers to stay informed about market trends and, if possible, to lock in a rate when favourable conditions arise.
In building for a better loan term, a strong credit profile, Ms Kihara says is crucial when applying for a mortgage. It not only increases the likelihood of approval but also results in lower interest rates and better loan terms.
“A credit profile is a detailed record of your credit history and current credit status. It typically includes personal information, credit accounts—details about your credit cards, loans, mortgages, and any other credit accounts, including balances, payment history, account statuses, credit inquiries, and public records,” she says.
What are the benefits of overpaying a mortgage, and when is it a good strategy?
Overpaying a mortgage can lead to several benefits, including interest savings, a shorter loan term, and increased home equity.
Ms Kihara says every extra shilling you pay on your mortgage reduces your principal balance, which means you will pay less interest over time.
“Overpayments can also reduce the length of your mortgage, allowing you to own your home outright sooner.
“They build equity faster, which can be beneficial if you need to sell or refinance. The payment provides peace of mind and increases your financial stability. However, if you refinance in the future, having a lower balance can lead to better terms.”
However, overpaying is not always the right choice for everyone. Homeowners should ensure they have a solid emergency fund and are not sacrificing other investments before overpaying.
Navigating the mortgage application process can be overwhelming, but Ms Kihara offers practical advice on what to do and what to avoid. One of the first steps is to get pre-approved for a mortgage. “Pre-approval gives you a clear budget and shows sellers that you’re serious about buying,” she says.
Additionally, Ms Kihara advises homebuyers to gather all necessary financial documentation, such as tax returns and pay stubs, before starting the application.
“Lenders will ask for a lot of information, so it is important to be prepared,” she adds.
On the other hand, there are several things to avoid during the mortgage process. The mortgage expert warns against making big purchases or changing jobs during the application, as this can complicate or delay approval. She also stresses the importance of reading the loan terms carefully and asking questions if anything is unclear.
Homeowners also need to protect themselves against potential market downturns or personal financial challenges. ‘‘building an emergency fund and opting for a fixed-rate mortgage if financial stability is your priority. Fixed-rate mortgages offer protection against rising interest rates, which can be especially important during economic downturns,” she explains.
Ms Kihara suggests making extra payments when possible and diversifying investments to safeguard against unexpected financial changes. “It’s also wise to stay informed about market conditions and to consult with financial advisors regularly,” Ms Kihara says.
With the right planning and strategy, a mortgage can be a powerful tool to help you achieve your financial goals.
