I am 33, single and working in Nairobi. I make around Sh90,000 net per month. I have savings of less than Sh350,000. I live in a rental house where I pay Sh40,000 in rent and about Sh5,000 on electricity and water. I also pay Sh3,000 for Wi-Fi. I support the mother of my child with Sh20,000 per month. She works as a secondary school teacher.
I don’t have any major debts to worry about but I have small ones such as beer debts and the occasional Fuliza. I am thinking of taking a mortgage to acquire a four-bedroom bungalow or maisonette but I am torn between buying the house within Nairobi areas or outside of Nairobi. How much should I apply for?
I would also like to know if I am making a mistake by going the mortgage way or if I should save up and buy a piece of land first, then build on my own. Please advise me – Hudson.
Your current challenge in owning a home is that your spending leaves little room to save towards this goal. Rent alone takes Sh40,000, or about 44 per cent of your net salary. Once you add utilities, internet and child support, you have spent Sh68,000 before accounting for food, transport and personal expenses. Taking out a mortgage under your current circumstances would therefore place you under unnecessary financial pressure.
Your first step towards home ownership should be to reduce your expenses and create room for consistent savings. Start by moving to a house where you pay about Sh20,000 in rent. Treat this as a temporary sacrifice towards owning your home. You could then limit electricity, water and internet expenses to about Sh6,000; food, transport and personal expenses to about Sh14,000; and maintain a monthly miscellaneous of Sh5,000. Together with the Sh20,000 you provide for your daughter, this would allow you to save approximately Sh25,000 per month.
To maintain this change, consider preparing a budget and working towards living within the allocated limits. Also, ensure that you deduct your savings immediately after receiving your salary and place the money in a Money Market Fund or another secure investment. You should also settle your small debts and avoid impulsive spending and excessive entertainment.
Once your finances are in order, you can choose between buying a house through mortgaging and buying land and building through savings - as well as whether to own your home within Nairobi or elsewhere. There is no outright right or wrong option.
Taking a mortgage to buy a completed house is simpler because the developer will ordinarily have dealt with the design, approvals, contractors, roads, water and other shared facilities. Such a house may also be easier to value and resell. However, you may end up paying more for this convenience, together with the developer’s profit.
If you choose this option, you could start by finding out whether your employer has a staff mortgage arrangement and comparing its terms with those of a KMRC-backed home loan. The Kenya Mortgage Refinance Company (KMRC) is a government-backed affordable mortgage facility accessible through participating banks and Saccos. KMRC mortgage repayments are limited to 40 per cent of net income, with repayment periods of up to 25 years or until retirement age. At 37, your practical repayment period may therefore be about 23 years.
At a fixed interest rate of about 9 per cent over 23 years, a monthly repayment of Sh36,000 could support a loan of approximately Sh4.2 million. A four-bedroom home within Nairobi is unlikely to fit within this budget and given your current circumstances, I would advise you to consider a smaller house. You may also need to look within the outskirts of the Nairobi metropolitan area or in another town where property prices are more affordable.
Buying land and constructing your own home may cost less and allow you to design and complete the house gradually. However, it also exposes you to land-verification requirements, building approvals, contractor supervision and possible cost overruns.
If you invest Sh25,000 every month for three years at an average net return of 10 per cent per year, and top up with part of your current savings – say Sh200,000, you will have accumulated approximately Sh1.3 million for your home. You could use this Sh1.3 million fund to buy land in a suitable outlying area while keeping the balance of your current savings as an emergency fund.
Once you have purchased the land, you could consider a Sacco loan, mortgage or construction loan to build your home instead of waiting to save enough money for the entire construction - while still paying rent.
Irrespective of the option you choose, delay borrowing until you have adjusted your lifestyle and created room for savings and mortgage repayments. Once you can consistently save at least Sh25,000 per month, you will be better placed to pursue your preferred home-ownership option without exposing yourself to financial distress.
