Home ownership, may by large be the ultimate life goal. A home serves as shelter, shielding us from the elements, whilst providing a type of investment and store of value, relevant for many generations to come. However, given the cost of owning one is a steep, home ownership remains a dream for many of us.
There are several options into owning a home, either by outright purchase if you have the capital, or through a mortgage option. There are other innovative market options such as the rent to own option, but we shall dwell on the 1st two options for now.
For outright purchase, this is the best option given the time value of money, but most Kenyans do not have the capital to foot the bill. What is left is the mortgage option. If you are able to land a mortgage loan from a bank, the minimum rate they might offer you is about 14%, which is high by any standard. Given this, this option locks out many borrowers.
In this piece, we shall explore 2 options, if you took a 10 year mortgage option from a bank against renting for 10 years while investing monthly in a money market fund.
The following assumptions were made;
For Option A
We are assuming a cost of a home at Kshs 4 mn
The 10 year mortgage rate at 14%
For Option B
Rent at Kshs 25,000 per month
Investment amount at Kshs 25,000 per month at 8% compounded annually
Since the house will be purchased 10 years from now, a capital appreciation of 1.3% (Nairobi Average)
If you take Option A, monthly payments will be Kshs 78,000, resulting in an overall payment of Kshs 7.5 mn in 10 years. Only a handful of Kenyans can afford to pay rendering this model unreasonable.
Option B however, presents a much better option for aspiring home owners. Rent payments of Kshs 25,000 per month will result in an overall payment of Kshs 3.0 mn in 10 years. This is 60% less than what the mortgage offers. The monthly investment of Kshs 25,000 in a money market fund yielding 8% per annum results in a payout of Kshs 4.6 mn at the end of 10 yrs. Assuming the capital appreciation on the house, a similar home in 10 yrs. time will cost the same Kshs 4.6 mn, placing you bang on the money!
As you can see, the monthly cost of option B is Kshs 50,000 (Kshs 25,000 in rent, and Kshs 25,000 in investments) while Option A is Kshs 78,000 in mortgage payments. It is also good to note that in Option A, the cost of yearly maintenance is an added cost on you since you own the house while in the 10 years you are renting, the cost is catered by the landlord, hence some other form of saving.
The above is just a snapshot of one of the various ways in which owning a home is within reach; you just have to structure your finances in the right way!
To access our resource on rent vs mortgage, visit out resources page here.
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