It should not be seen as lack of ambition when I say that I am not so much into real estate but living under a rent-free house would give me satisfaction, better still a dream house.
With this thought, the allure of mortgage has always been my best pick. Being a bank staff, the interest rates applicable are incomparable to the commercial long term lending rates in any financial insitution in the market. There’s also something about age that I’m favors me.
This article ‘House rent is not your enemy’ by Bernard Were really got me thinking….
In a decisive resolve to own a family house, a couple who reasoned they wanted to stop paying rent and live in their own house, arranged for a Ksh 47,000 per month 25 year mortgage plan with a Ksh 475000 down payment on a property valued at Ksh 7.5M .I took out my calculator, did my quick math and it intrigued me the rationale that would inform such an evidently prohibitive choice. While it seem an obvious case of common sense to me and I guess indeed to many folks, this well meaning couple evidently allowed their innocent desire for family comfort and convenience to cloud their sense of judgment and consequently deny themselves an opportunity to leverage themselves for a solid financial foundation.
For a start, why would one pay Ksh 7.075M more for anything?
This by all standards is a tidy sum you would agree. But there are arguments for the logic though, one of which, that in 25 long years the property price will have appreciated considerably; a fact I obviously wont dispute.
But therein too lies my investwise beef! Let’s suppose a credible chance that this couple would keep the promise of their bargain and that is, never to default in their monthly installments (failure would in all likelihood mean losing the property and any contributions remitted)! 25 years for a couple in their mid 30, means the mortgage term would take the rest of their active years, perhaps to retirement. Consequently these means they would own the house yes, but perhaps that would be the only thing they would have accomplished in their working life with the enormous resource advantage that is evidently at their disposal.
For this family, the connotation- rent, it appears is what they had an issue with, and consequently moved from a Ksh 15,000 monthly one (this is what they were paying as rent)for a two bed roomed flat to one christened -mortgage going at Ksh 47,000 with Ksh 475000 “appreciation,”- for what?
Picture this mathematics: These extra Ksh 32,000 per month channeled to a simple monthly investment giving modest return of 12% p.a compounding interest will in just 25 years accumulate to over Ksh 60,000,000! That’s right! That means these good people would still live comfortably paying rent but using the extra- capability to invest for returns that would enable them acquire- if they desire to, not only a family house but also capital for other venture if they choose to, at the end of the 25 years. The Ksh 475,000 can be a good enough capital for simple investments as forex or shares portfolio.
While it won’t be feasible here to offer full synopsis about such simple common wisdom on money sense, my advice to this folk as indeed to those that would find themselves in a similar hole was rather a simple one. They were better off paying rent than living off a “mortgaged vision”. And even with that commitment having been entered into, to plan an exit strategy and secure their financial liberty once again. How? By finding a suitable tenant for this property and engaging him/her to pay for the mortgage on their behalf. Or better still, if they could, find someone who would pay slightly more, say, Ksh 50,000 per month. This would then mean that at the end of it, they would get some change for part of their Ksh 15,000 rent and still acquire the property for free, in the meantime releasing pressure off their pay slips to think of investing for their future.
They thanked me for helping them see it that way!
From Bernard Were.