SHOULD YOU GET A MORTGAGE?

In the Western world, it is common practice for people to acquire real estate property through mortgages. It used to bother me a lot whenever I saw a young person of 21 years old post on social media that they had bought their first house. Relating to the Ugandan context, this was simply unimaginable.  Owning a home at such a young age was for rare, exceptional individuals, especially if they had to acquire it independently. And then one day, I discovered the magic of mortgages.

For those who don’t know, a mortgage is a loan that helps you buy a home or property when you don’t have all the cash upfront. John is 21, and after finishing school, he wants to own a home. But he doesn’t have 300 million Ugandan shillings to buy the house. However, he saved 30 – 60 million shillings in his first job. He will go to the bank and ask for a mortgage. The bank only requires him to pay the 60 million, and they will give him the rest to buy the house. They usually ask for evidence of his ability to pay the loan, through his job or other regular income.

The bank maintains legal rights to the house until the loan is fully paid back. In Uganda, this period is usually between 15 and 20 years, and the bank charges an annual interest typically between 17 and 20%. John will go on to enjoy the house as the bank continues to earn from the loan for the next twenty years. And they will live happily ever after. Or so I thought.

If you are deciding whether to acquire a mortgage, there are several things to consider.

1.      Affordability

The most crucial factor is whether you can afford the monthly payments over time. A secure job that pays regularly is critical to success, because the bank will always need its payments. Failure to make payments could lead to losing the house in a foreclosure process. In this process, you will likely incur a heavy financial loss, given that the house will be sold below market price for the bank to recover its money. Financial advisors advocate for your monthly housing expenses not exceeding 30% of your income to be considered affordable to you.

2.      Interest rates

Banks offer different interest rates, depending on the duration of the loan, prevailing market conditions, and their internal policies. You have to shop around for the best deal because even the slightest difference in rates could imply a significantly higher cost over the long term. People in developed nations typically pay rates between 3 – 7% on their mortgages, whereas in Uganda, it’s a whopping 17 – 20%. Such a difference in rates means you could pay three times the house's value over the loan period. This high interest rate is why I wouldn’t recommend that anyone in Uganda get a mortgage to acquire a home. The cost is too high.

3.      Other related costs

When you acquire the home through a mortgage, your costs will not stop at the down payment and interest. You must pay closing costs of around 3% of the loan value. Life insurance costs and property taxes will also be involved. We should not forget regular maintenance costs to keep the property in shape. All these could strain your finances if you are not prepared.

4.      Alternative Options

You need to ask yourself, What options do I have? In the meantime, renting could be a better alternative as you save up for your house. Or would you rather build equity in a house through mortgage payments as you enjoy the house simultaneously? It is essential to do math since, for most people, a house will be their most significant single expense in their lifetime.

The decision to get a mortgage or not should be carefully considered, because it will be a significant part of your financial well-being. The considerations are even more critical for real estate investors looking to get returns on capital invested in properties. High interest rates and other related costs could spell disaster for the performance of your investment. One should consider all financing alternatives before signing up for mortgages, especially in Uganda.

To learn more about investing in Uganda’s Real Estate industry, visit https://www.barosgroupltd.com/

About the author;

Benard Sonko is a real estate investment manager and the founder of Baros Group Limited. For comments and inquiries, you can reach him at +256742140251 or info@barosgroupltd.com