By Kilundo Mbithi
The standard narrative is to finish college, get a job, get a mortgage as soon as possible then settle down. I am sorry that may not be the smartest financial move in this part of the world. Tighten your seat belt for a short reality check. I’ll try keeping it simple and real.
Most important things in life are never taught at school and frankly don’t expect them anytime soon. In this whole existence, the only thing that matters at the end of the day is whether you are happy. And when money matters are brought to the fore, happiness tends to jump out right through the window. The opening story line is not alien to many of us. When it comes to looking for happiness especially in an African setting owning a home is paramount. However, this line whose origin is from the West has brought a lot of unhappiness to many young African families.
The truth is, if you left college and got employed then you simply cannot afford a home. Especially through the current mortgage rates and more so if it is your first “investment”. First it is not an investment, it is an expensive manuevre which will break your back if not leave you broke for the rest of your life. Let me explain by looking at four simple financial realities.
1. Interest Rates.
Interest rates in Kenya and many African countries are double digits which is very expensive. Conversely, interest rates in developed nations from where the idea was borrowed are less than 3%. For that, your installment payments if you borrow at our current rates will be 3 times more than your counterpart in the US, Europe, and Japan. Quick math. Ochieng borrows KES 8M for 20 year at 16% interest. Every month he pays KES 111,300/=. Robert who is in US borrows $ 81,000 (Equivalent to KES 8M) for 20 years at 2.3% interest. Every month he pays the equivalent of KES 47,639/=. Muller in Germany borrows a similar amount for 20 years at 3.2% interest. Every month he pays 35,956/=. Suzuki in Japan will borrow a similar amount at 0.85% thereby paying the equivalent of KES 36,712/=. The above rates are indicative of current average mortgage lending rates in the respective countries. It’s that simple.
Uncertainty about the future is going nowhere. So there is always an inherent risk of default should the primary source of income dry up. Unexpected mergers, companies folding up, sickness, name it. When that happens Ochieng will have to raise Kes 111,300/= per month if he intends to keep his asset. The only recourse for him and our three friends should such an event occur is to let the house out. A house going for Kes 8M (say Buruburu Estate) will let at Kes 35,000/=, less than half his mortgage installments. Risking repossession, Ochieng will have to top up the difference to retain the house, but from what sources?. Robert, Muller and Suzuki can have a tenant who will pay them monthly rents equivalent to the full mortgage if they had raised a small deposit. Here it can be shown that justifying a mortgage as an option to stop paying rent is a very expensive way of thinking.
3. Maintenance Expenses.
Homes are expensive to maintain. It is not just about paying the mortgage. Over and above the mortgage installments, there is maintenance of lawns, fences, driveways, common services and wear and tear. If you happen to buy a home on its own plot there may be a considerable requirement for security and most probably additional house help. There is every likelihood that Ochieng’s monthly bill will rise to 150,000 per month compared to renting a similar house for KES 35,000/= per month and investing the difference elsewhere.
4. Opportunity Cost.
Everything in life has an opportunity cost. It is imperative that you always look at the opportunity cost of every financial decision. The concept of opportunity cost is simple. If you choose to buy a home, you forgo the money. If you choose the money you forgo the home. Therefore, ability to pay mortgage at Ochieng’s rate implies that you have about 150,000/= monthly disposable income. The decision is to either buy a home or rent a similar house (say at Kes 35,000/=) and keep 115, 000/= for investments. Here is the reason why you can’t afford a mortgage in Kenya at the current rate. A stream of 115,000/= per month can be invested in other pieces of real estate to generate the rent you need on a monthly basis and leave you with more to spend for the rest of your life. How? A little creativity and a bit of learning basic real estate investing principles some of which I teach.
The Author is a Valuer & Registered Estate Agent and runs an investor education & coaching program at www.investorclinics.com