My name is Reuben. I took out a mortgage to finance my current residence. Unfortunately, interest rates went up to 22 per cent immediately after. I have tried to consolidate my loans and I partly succeeded last year through an equity release that reduced the interest rate to 13.5 per cent, but also added more problems because the one-off costs for this process led to having other loans, yet I was also highly indebted in the setup costs of the residence.
My monthly net salary is Sh299,000 after taxes and pension savings deductions. I also have other irregular income from side hustles of Sh5,000 per month. My monthly expenses are: Mortgage Loan 139,000, Personal Loan 19,500, Life Insurance 1,605, School Fees 155,000 annually (about 13,000 per month), Utilities 15,000, Transport 30,000, monthly tithes, black tax, and small savings schemes 40,000, investment towards a rental house 40,000, (balance is Sh1,030,000 and maturity is June 2028). The rental house is ready and will only be handed over after payment of the balance. The expected monthly rental income is 11,500, before tax. These expenses utilise my entire net salary.
My loans are as follows: Mortgage Balance Sh9,140,000 (maturity is August 2034; monthly rental value can only be Sh50,000 if I was to rent it and move out to a cheaper rental place), Personal Loan Balance 324,000 (maturity is January 2027), Other loans 2.6m (including 600,000 overdue mobile loans and loans from friends and chamas, which I am unable to pay currently). This is my biggest concern. My savings are only Sh200,000, excluding pension. Please help.
I have tried to consolidate my loans, but also added more problems.
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Dominic Karanja, a financial planning and investments consultant
You are currently experiencing significant financial challenges, including high debt levels and negative cash flow. This is a classic case of debt distress, where your income is fully committed, leaving you with minimal liquidity, increasing obligations, and no clear margin for emergencies or growth. The "other loans" present the most pressing concern due to their overdue status and the likelihood of accruing high interest rates.
Based on the information you have provided, it is evident that you are not adhering to the one-third rule, which states that deductions from salary should not exceed two-thirds of net pay. Your commitment to the rental property investment is worsening your cash flow difficulties. Consider the following.
Address the "Other Loans" (Sh2,600,000). For mobile loans and loans from friends and chamas, contact your lenders immediately. Explain your situation and attempt to negotiate a repayment plan, even if it involves smaller amounts. Clear the Sh600,000 overdue within 12 months by allocating Sh50,000 per month from expenditure cuts and side hustles. Then tackle the Sh2 million other loans. The personal loan of Sh324,000 is manageable if you avoid new debt.
Use your Sh200,000 savings strategically. Avoid using it to pay off a small portion of a high-interest loan if it does not significantly reduce your monthly obligations. Consider keeping it as an emergency fund after establishing a clear debt repayment plan.
Cut discretionary spending. Use public transport, carpool, or walk to save Sh5,000 to Sh10,000 per month. You may have to re-evaluate tithes and black tax. Pause small savings schemes for now. Aim to cut Sh10,000 to Sh20,000. If you can rent out the house for Sh50,000 and find a cheaper house where you will be paying at least Sh30,000, the Sh20,000 net gain could go toward repayments of loans.
You’re putting Sh40,000 monthly into a rental unit whose income won’t materialise until mid-2028. That’s almost three years away. Approach your investment partner to arrange a temporary pause and/ or investment restructuring if there's the possibility of a worst-case scenario (penalties and loss of money already invested) for a duration of time to free up funds for the more urgent debt repayments.
Significantly increase your income. Assess if you can offer additional services, improve your marketing efforts, or secure a higher-paying side job.
After doing the above, consider debt consolidation from a bank or Sacco. This loan could potentially offer a lower interest rate than the current on "other loans". It is important to ensure that the consolidation loan covers all high-interest "other loans." Compare the interest rates and repayment periods carefully to avoid the mistakes of the first consolidation that you did.
Check if refinancing is possible for example, via Sacco at 12 per cent annual interest rate on reducing balance. Even a one per cent reduction can save at least Sh5,000 monthly. Once you've managed your other loans, you can resume funding your rental house investment.
After reducing other loans and achieving positive cash flow, rebuild your emergency fund to cover six months of essential living expenses. Your Sh200,000 savings can start this, but might need replenishing after paying off debts.
Maintain a consistent budgeting process and monitor your expenses regularly to adhere to your plan and identify areas for potential savings. Review your Life Insurance to ensure it meets your needs and is competitively priced. Although your situation is challenging, by addressing immediate concerns and remaining focused on long-term objectives, you can achieve stability.
