September 12, 2022

Two common types of mortgages in Kenya

In the current Kenyan market, several options are available for you to acquire a home. First, you could buy it through an instalment plan, pay in a lump sum or go the mortgage way. Today we shall talk more about the mortgage option by shedding light on the two common types of mortgages in Kenya.

What is a mortgage?

This is a debt facility offered by a bank or mortgage lender to facilitate property or home purchase.

When taking a mortgage, most people are keen on the fees involved and the interest rate than anything else. However, it is important to know the mortgage loan types at your disposal so that you can settle for the most convenient option.

There two more common types of mortgages in Kenya are;

  1. Fixed-rate
  2. Adjustable-rate (Variable rate)

Fixed-rate mortgages

This type of mortgage gives you a fixed interest rate over a certain term of, say, 10 or 20 years. Under such an arrangement, the shorter your repayment term, the higher the monthly repayment installment.

On the flip side, the longer your repayment period, the lower your repayment amount. However, longer repayment durations ultimately result in more interest charges.

Advantages of a fixed-rate mortgage

  • Most borrowers celebrate this type of mortgage because they can rest assured that their monthly payments will remain the same until they clear the mortgage. This makes it easy to fix a monthly household budget, knowing you won’t run into unforeseen charges on any particular month.
  • Also, if the market interest rates rise significantly, you can lock in lower rates. Thus you won’t have to remit higher monthly payments. What’s more, lenders leverage fixed rate specials as they compete.
  • It is worth noting that fixed rates do have limits regarding any voluntary adjustments you may want to make in your repayments. The limits entail you footing some charges when making such extra payments.
  • Additionally, if the floating rates sink below your fixed rate, you won’t enjoy the benefits from the drop.
  • Worse still, if you decide to break your fixed loan or sell the property, you may be asked for a break fee.

As stated a little earlier on, fixed-rate mortgage plans are suitable for those who plan to pay over a prolonged period. You may settle for a 20 year fixed loan because it gives you the space to pursue other projects without pressure.

However, if you have a good risk appetite, the resources, and the discipline to settle the mortgage faster, then a ten-year fixed loan would see you save significantly on the interest by slashing your repayment period by half.

According to the Central Bank of Kenya, the maximum loan maturity period in the mortgage context is 20 years; but as of 2019, the average period offered by most lenders was 11.3 years.

Adjustable or variable rate mortgages

Here, the interest rate changes over the loan’s duration. Some adjustable-rate mortgages run on a fixed rate for a given period before it begins to fluctuate. Such a fluctuation is necessitated by spontaneous changes in the market rates, which affect the borrower’s monthly payment and interest.

The interest rates on variable-rate mortgages get reviewed and adjusted at specified times. The review and adjustment largely depend on the mortgage lender, but typically, it happens yearly or after every six months.

Some lenders have a rate cap specifying the maximum amount that a borrower may pay every month. It is, therefore, essential for you to do your math well to ensure that your income streams can handle any variations up that cap.

It would be wise not to consider the prospects of selling your home or refinancing your mortgage before it resets since personal finances or the market conditions could change.

Variable rate mortgages rank among the most preferred types of mortgages in Kenya

Advantages of variable rate mortgages

Some of the advantages that come with this mortgage type include;

  • You can make changes without facing the risk of penalty. Such changes may include changing the loan terms or paying off the loan earlier.
  • You will enjoy a lower fixed rate during the initial years of the loan.
  • You can consolidate additional debt into a floating rate loan.

Potential risk

One high risk that characterizes this type of mortgage is that the interest rates may shoot considerably over the loan’s lifespan. If the borrower’s income streams are not steady, such increases may cause them to default and eventually lose the home through foreclosure.

This will be a great option if you plan to refinance before the loan resets. Remember, variable-rate mortgages’ interest rates are typically lower than the fixed rates during the loan’s formative years. This means that you could save more on interest payments in the early years of homeownership.

The choice of a mortgage loan largely depends on your financial situation. This comprises factors like your income streams, credit history, credit score, employment stability, and financial goals.

While making such a decision may be confusing, a one-on-one session with mortgage lenders can help mitigate its complexity. They will, for example, help you settle for your ideal product, having understood all the requirements for qualification.

For the best outcomes, it is crucial to do a thorough comparison of all the deals on offer, considering all the mortgage aspects, including the type of loan, its requirements, fees, interest rates, payment flexibility, potential penalties, and more.

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