Before you take out a mortgage

I was taking a walk recently in our estate and I noticed something scribbled in large letters on the wall fence of a big house. On closer inspection I realized that it read something like “BANK MORTGAGE. CALL 0708XXXXXX.” Obviously the owners of this house had failed to pay the mortgage and the house was being put up for sale by the bank to recover their money. I can only imagine the stress and psychological torture the owners must be going through.

This prompted me to do some research and offer some guidance to anyone considering acquiring a mortgage or home loan. Before you take out a mortgage you need to consider the following:

  1. Interest rates. The interest rate is key. The higher the rate the higher the repayment. Shop around before settling for anything. Mortgage rates in Uganda shillings are quite high and range anywhere from 15 to 25 percent. The rates are lower when you borrow in US dollars. Take note whether the rate is fixed or it changes as the economy changes. A flexible rate can be disastrous when the economy is doing badly.
  2. Closing costs. There are hidden costs before you can close on a financing transaction including insurance, valuation fees, etc. Make sure your banker discloses all these fees.
  3. Total cost of project. You need to properly evaluate how much you will need to complete the project. Get a good architect and quantity surveyor. Also get a good professional contractor who wont cheat you and escalate the costs. You don’t want to take out a huge loan and then fail to complete the project.
  4. Repayment period. The longer the repayment period the larger the amount you will pay back. Make sure you get someone who can model for you the full repayments and costs before you take out the mortgage. Don’t rely on the bank people. They may not disclose the real cost of the mortgage. Their only interest is to sell you their loan.
  5. Income levels. You should be able to meet the monthly repayments without stretching too much. Remember this is a long term project of typically 15 to 25 years.
  6. Residential or commercial? A residential project will not generate any income to repay the mortgage. So you have to rely on other sources of income. A commercial project should be able to generate sufficient cash flows to repay the mortgage and give you a decent profit. Make sure you get someone competent to do a proper investment appraisal before you take on a lot of risk.
  7. Financing terms. You may maybe required to finance a portion of the project say 10 to 20 percent. Make sure you can raise the required financing on your part.
  8. Currency of loan. The bank will typically offer different rates for different currencies. A US dollar loan will have a lower rate compared to a UGX loan. If you’re borrowing in foreign currency make sure your incomes/rents are also in foreign currency to reduce exposure to Forex fluctuations. 
  9. Viability of commercial project. Evaluate properly the commercial viability of your project. For instance if you’re putting up apartments consider the location of the property, amenities, nearby factories, schools, health facilities, shopping centers, distance from town, road networks, power, water, etc. These considerations will enable you to judge the kind of people you will attract in your property.
  10. Stability of your job. If you’re getting a home loan you need to have a stable job. It is quite risky to get a 15 year mortgage when you have a three year employment contract. What happens if your contract is not renewed?
  11. Don’t divert funds. If you get money to build rentals please use it to build rentals. Don’t be tempted to start a hardware shop. Diversion of funds is one of the top reasons why people default on loans.
  12. Legal stuff. Get a good commercial lawyer to interpret for you all the technicalities of the loan agreement before you sign. Don’t rely on the bank lawyers. Their only interest is to sale you the loan.
  13. Size of project. Bankers will typically try to sell you the biggest loan you can afford even when you don’t need all the money. Naturally you may be tempted to build a much bigger home or rental project. However this increases your monthly repayments and risk of default. Do something within your means.
  14. Alternative financing. Is it possible to pull off the project or consider a smaller project and raise the funds from other sources? Can you use a bit of savings, soft loans, advance from work, or sell off some other assets? You may find that if you go for a smaller cheaper home you may be able to pull off the project without borrowing.
  15. Nature of bank. Some banks are more mortgage friendly than others. Some banks have been involved in fraud and customers have lost their property. Treat this transaction like  a marriage and do your due diligence.
  16. Gearing levels. Consider all the other loans you have. You don’t want to take out a mortgage when you’re struggling with salary loans. Your overall financing should only form a small proportion of your net worth.
  17. Applicable taxes. Consider the applicable property/rental taxes. URA has become very vigilant.

The bank people are generally good people when they’re giving you a loan. However they are not really very friendly when they are recovering their unpaid loans. They have targets from their bosses and Bank of Uganda to manage their credit exposure. So they will apply all the tricks at their disposal to recover their money including advertising your property in the newspapers and writing on your wall.

If you’re interested in conduction a proper financial evaluation of your project before taking out a mortgage please do get in touch through email or mobile 0788437543/0708509164. 

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