A mortgage is a debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front.
Mortgages in Kenya fall under two types, that is,
a. Fixed rate mortgages
The borrower will owe a percentage of the loan as interest. This amount never changes and remains constant over the life of the loan.
b. Variable/Adjustable rate mortgages
In this type of loan, changes in the credit market are reflected in the repayment rates. Equal repayments are made on a reducing balance. Part of the interest rate risk is transferred from the lender to the borrower. Variable rate mortgages are widely used where fixed rate funding is difficult to obtain or prohibitively expensive.
There are several factors that broadly define the characteristics of mortgages in Kenya and elsewhere globally. These may include;
- Interest – this is what banks gain from the loan from the repayments made. Interest may be fixed over the life of the loan or it may be variable, changing at certain predetermined periods. It may rise or it may fall, depending on existing market conditions.
- Prepaid amounts – some lenders will limit or restrict prepayment of part or the entire loan. If the borrower decides to prepay, then he may also pay a penalty to the lender for the prepayment.
- Amount and frequency of payment – in some cases, lenders may offer the borrower an option to increase or decrease the amount paid, without incurring penalties. The amount paid per period is variable.
- Period of the loan – this refers to the time period the loan is lent out for. The borrower may be required to pay the entire amount after that lapsed time period. He may also be required to pay a certain amount at the end of some predetermined period.
The following are loans offered by lenders including banks and finance institutions:
The Owner Occupied Residential mortgage
This is offered to buyers intending to purchase a house to live in. The mortgage is popular among most borrowers, and lenders may lend up to 90% of the total cost of the property. CFC bank is offering up to a 100% of the home’s value.
This refers to the situation where the borrower intends for the property as an investment and not as their primary home.
This type of mortgage is directed towards construction of property. The lender may require that the project is overseen by professionals, like architects, engineers, and so forth.
The lender normally disburses the money on an arrears basis to the contractor or person contracted to build.
Top up loans and/or equity release
The lender loans out money on the value of the property. Repaying the mortgage allows one to gain equity in that property. This equity can be availed to the borrower as equity release or top up.