BE CLEVER WITH YOUR MORTGAGE

BE CLEVER WITH YOUR MORTGAGE

Some financial institutions have started advertising reduced mortgage rates in the past week. When most people hear this, the appeal is usually the reduced payment that comes along with it. I have a client who took her initial 20 year mortgage of Kes 7 million at 25% p.a. Now she is being offered a rate in the range of 17% per annum. Her initial excitement about this was that her repayment would move from Kes 146,000 per month to Kes 102,000 per month, saving her Kes 44,000 monthly. With the reduction in rates, it means less of her monthly repayment is going towards servicing interest. In the early years of her mortgage and at a rate of 25%, Kes 145,000 is going towards servicing interest, leaving only Kes 1,000 to actually work towards reducing her loan balance. At a rate of 17%, Kes 99,000 is going towards servicing interest. In the initial years of any mortgage, more of your funds will always be directed toward servicing interest. Even with the 17% p.a. rate, the amount of interest you will pay over the life of the mortgage if you only do standard payments will be over Kes 17 million. On the 25% p.a. rate it will be Kes 28 million, four times the amount of money you borrowed. If you have a mortgage or thinking of getting a mortgage, definitely do not ignore the impact of even just small differences in interest rates offered. The difference in interest costs between a mortgage of 18% p.a. and 17% p.a. is about Kes 1.3 million over the life of that mortgage. To put this way, the benefit of taking a bit of time to shop around is Kes 1.3 million. You are not obliged to get your mortgage with the bank you have held your current account with for the last 5 years, because you like the relationship manager. Sometimes telling your bank what else you are being offered gives them incentive to reduce their rates. You can then imagine what a 2%, 5% or 8% difference will do to your pocket. Just because you feel you can afford the repayment does not mean you can’t do with some extra savings along the way. Also always put in more than is required towards your repayment. Back to the example of my client, she was already paying Kes 149,000 per month comfortably. There is no reason for her to stop doing that simply because the minimum repayment required is now Kes 102,000. She should make extra repayments to her new mortgage. The impact of this simple move will be that she will pay interest of only Kes 5 million over the life of the mortgage as compared to 17 million if she did the standard minimum repayments. Secondly she will finish paying her mortgage off in 7 years as opposed to 20 years. For everyone these calculations will be different depending on loan amounts, time etc but making an extra payment on your loan or mortgage will always have the impact of reducing time and reducing your interest costs because the extra payment goes towards reducing your principal i.e. the actual loan balance every month. Do not underestimate the impact of even small amounts of extra repayments into your loans.
Waceke Nduati- Omanga waceke@centonomy.com | www.centonomy.com

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