UGANDA, Kampala | Real Muloodi News | Josephine and Alphonse Nyanda, a fairly affluent couple, had rented the same home for the past seven years. They loved the home, the location was perfect for them, and it is where they raised their two children.
The couple woke up one morning to a notice from their landlord that their beloved home was on sale.
The landlord offered to give them first consideration if they wanted to buy the house themselves. However, while the couple had some savings, it wasn’t enough to meet the landlord’s sale price.
“At first, I laughed at the idea because I knew we could not come up with the Shs250m the house was going for. But we loved the house, it is the only home our children knew and more than anything, we wanted to give them that continuity,” says Nyanda.
A chance conversation led the couple to a bank, where they were able to obtain a mortgage for the rest of the money they needed buy their home.
What is a Mortgage?
A mortgage is a loan granted to acquire real estate such as land, a house, or a rental property, for which that property then serves as collateral. The loan is paid back through a payment plan agreement made between the borrower and the lender, with interest, over a predetermined period.
When a person uses a mortgage to purchase real estate, they do not pay the total purchase price upfront. Instead, the lender will put up the money for the purchase, and the borrower pays back the loan and interest over a set period until the loan is satisfied. At which time the borrower will own the property. Should a property buyer default on their loan, the lender/bank reclaims the property, and will most often sell it to recoup their money.
Most commercial banks in Uganda offer mortgage loans. The banks tailor their loans to the type of customer they wish to attract.
Micheal Mwesigwa, Head of Marketing at DFCU Bank, said the following mortgage loans are available through DFCU: mortgage, refinance, equity release, construction loan, buy-to-let, and outright purchase. However, bank interest rates and offers will vary between different banks.
Mortgage offers may appear enticing, but key factors to consider before accepting a mortgage are principal and interest.
Principal and Interest
The term “principal” refers to the amount of money borrowed from a lender to purchase real estate.
Interest is the cost of borrowing the principal. Interest payments are a percentage of the loan. At the time of writing this article, interest rates in Uganda are around 16.28%.
Interest can be fixed or variable. A fixed interest rate means paying an amount agreed upon between the client and the lender and is not subject to change for the duration of the mortgage loan.
Banks will usually set high fixed interest rates to minimise their risk. This is because banks have to make guesses about the economy and the housing market that span over a long period, that are difficult to get right.
On the other hand, variable interest rates will be a lower rate than the fixed rate the bank has on offer. However variable interest rates will fluctuate over time, depending on market factors. This means the rates could change and they may go up, but they may also go down.
Principal and interest make up the monthly mortgage payment, not including applicable taxes and insurance. Financial institutions typically require equal monthly payment instalments.
What is Requited to Get a Mortgage Loan?
Molly Akite, a relationship officer at Housing Finance Bank, explains that the first step to accessing a home loan is to have 30 per cent of the purchase price to contribute towards the purchase of the property.
Getting a mortgage loan also requires the verification of the borrower’s income, to show they can afford to pay back the loan. Such proof can could be a letter from the employer, or if self-employed, a bank statement for the last 12 months.
Other requirements include the verification of land title certificates and a valuation of the property.
You will also be required to pay some fees related to the acquisition of your mortgage. These fees will cover application fees, title search and credit inquiry, boundary opening and valuation, stamp duty and transfer fees, as well as arrangement, insurance and legal fees.
How Much Money Can I Get?
The size of the loan you can obtain is determined by the repayment amount, which is based on the amount of money that you can prove you can afford to pay back. If a person is earning a higher salary, they can generally get a bigger loan compared to someone who earns less money.
Banks will typically have a minimum borrowing amount also, for example, the minimum loan amount from Housing Finance Bank is Shs10m, while DFCU’s minimum is Shs30m for a salaried employee who earns up to Shs2m per month.
A mortgage enables more people to purchase property that they might not have had sufficient funds to buy outright. Such is the case of Josephine, and Alphonse Nyanda who unexpectedly took up their mortgage.
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