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Is Taking a Mortgage the WORST Decision Ever??
Rank: Elder Joined: 7/22/2009 Posts: 7,341

kiwaru wrote:And a lesson i have learnt is that high riskhigh return investments need to be anchored in low risklow return investments because there is a season for... and a season for... I agree with you @kiwaru. You need to balance risk. I'll tell you for a fact, one of my long term goals is to build a block of flats. Now, do rentals have the same yield as stocks? Not by a country mile! Returns in the stock exchange are far much higher that what you would get from rentals [surprise, surprise!] Then why would I want to do flats. 1) My kids  They don't need much 'financial education' to collect rent if God forbid I was not around anymore. They might not necessarily fair too well in the stock market if they don't have the interest. The block of flats would be my security for them! 2) I might get tired of the stock market as I grow older  maybe prefer travelling to analyzing stocks and company performance. Luckily I will have the mother of all passive incomes. 3) Stability  Despite what happened in the US, rentals would provide a defense to any shocks that might be experienced in the future! 4) Risk averse(ness)  As you grow old, you become more risk averse. Low risk, low return will do. And in any case, you should have made your money in your younger ages and probably in old age you are just interested in protecting it from inflation! But the fact remains, I will not do my block of flats on 15%+ interest mortgage. Best case scenario [henceforth referred to as 'the plan'. He he he], is to make my money in the stock market and else where then "park" some of the money in a block of flats! Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.


Rank: Newfarer Joined: 1/3/2014 Posts: 32

Pardon my numbers, at 15% the house will be worth 163,665,373.


Rank: Newfarer Joined: 1/3/2014 Posts: 32

So, if the @kiwaru guy bought shares 33 years ago worth Ksh 1 Milion, will he be worth Ksh 100 million today? Thats why i insisted to use an average rate of return of the NSE for the assumption to be valid.


Rank: Elder Joined: 7/22/2009 Posts: 7,341

Lolest! wrote:asante maich, but as @kanobi notes, you are omitting the issue of incremental income/expenses ie you havent compared like for like. The guy who doesnt take the mortgage will continue paying rent which will increase maybe evry 2years. Even if the mortgage taker rents out his house, this needs to be factored in as income. Then the issue of the 20k max monthly mortgage relief on tax If you go back to post# 1, I subtracted 31k from my calculations. Mortgage payments was 131k, I pegged investments at 100k. Use the 31k to pay rent. People also seem to forget what happened just short while ago  interest rates shooting to almost 30% from 16%. Were that to happen for two or more years, many people would have to be put on suicide watch!!! It's not only rents can go up. Interest rates too can. The latter is worse * 100! Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.


Rank: Elder Joined: 7/22/2009 Posts: 7,341

knight026 wrote:Assuming that @kiwaru rates hold on (ie 15% for real estate) the house will be worth Ksh 100,699,828 in 20 years. This means the guy will have made Ksh 69,096,878. I believe @kiwaru was discussing the % of his wealth that is held in different instruments, not earnings/income. Or which post are you talking about? Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.


Rank: Newfarer Joined: 10/29/2013 Posts: 13

MaichBlack wrote:jaggernaut wrote:Saw this advert on yesterday's Washington Post. Are these mortgage rates real or there are numerous hidden charges? Cheapest in Kenya is currently about 14%. Yeah! Mortgages in the US are that low. At one time they were below 4% and high net worth individuals were getting mortgage at rate of as low as 1%!!! This is basically FREE MONEY because it is lower than the inflation rate. Even if you have money, you'd rather invest your money elsewhere and take the free money!!! Kenyan rates are the ones that don't make any economic sense whatsoever!!! As @dunkang correctly states, rates of 4%  6% would make economic sense. Zuckerberg’s Loan Gives New Meaning to the 1%Why does a billionaire need a loan??? Houses in kenya ara over priced, how do you explain building a unit for 4m approximately, somewhere, then end up selling the house for 10m, the banks noticed the overpricing and decided, u know what, lets offer Kenyans high interest morgage the prices of the houses will want them to take the morgages despite the high intrest rates Maji yakizidi unga toroka


Rank: Newfarer Joined: 1/3/2014 Posts: 32

MaichBlack wrote:What's more @knight026 even with a modest return of 16% p.a. you still end up with 172 million!!! Or a 20 year old house
=FV(16%/12,20*12,100000,0,0)
"Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it."
― Albert Einstein I quoted Kiwaru numbers, at an average of 15% return for real estate, the numbers remain the same. Your assumption is that the person paying the mortgage will just sit in the house he bought, and not sale it even though he knows that its worth more than Ksh 160M


Rank: Elder Joined: 7/22/2009 Posts: 7,341

MaichBlack wrote:Lolest! wrote:asante maich, but as @kanobi notes, you are omitting the issue of incremental income/expenses ie you havent compared like for like. The guy who doesnt take the mortgage will continue paying rent which will increase maybe evry 2years. Even if the mortgage taker rents out his house, this needs to be factored in as income. Then the issue of the 20k max monthly mortgage relief on tax If you go back to post# 1, I subtracted 31k from my calculations. Mortgage payments was 131k, I pegged investments at 100k. Use the 31k to pay rent. People also seem to forget what happened just short while ago  interest rates shooting to almost 30% from 16%. Were that to happen for two or more years, many people would have to be put on suicide watch!!! It's not only rents can go up. Interest rates too can. The latter is worse * 100! By the way I had a friend who's loan's interest rate shot from [a company negotiated] 14% to 28% during that period. The fellow almost went bonkers!!! And at the time nobody knew how long it's gonna last! For the mortgage discussed in post# 1, if the interest rate was to change from 15% to 28%, that would mean you monthly payments will increase from Kshs. 131,678.96/= to Kshs. 234,257.14/= just like that! Can this happen? YES!!! Didn't it happen just the other day? And we are talking about 20yrs! A lot can happen in 20yrs!! Those are 4 elections  In a country where almost everything is tied to politics and who wields the power. With stocks, you can move your money around  within or outside the country. Just the same way people moved to the money market and other financial instruments when interest rates short through the roof. Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.


Rank: Elder Joined: 7/22/2009 Posts: 7,341

knight026 wrote:MaichBlack wrote:What's more @knight026 even with a modest return of 16% p.a. you still end up with 172 million!!! Or a 20 year old house
=FV(16%/12,20*12,100000,0,0)
"Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it."
― Albert Einstein I quoted Kiwaru numbers, at an average of 15% return for real estate, the numbers remain the same. Your assumption is that the person paying the mortgage will just sit in the house he bought, and not sale it even though he knows that its worth more than Ksh 160M Are you kidding me??? Can you kindly illustrate how you get 15% returns from a house you bought on mortgage. Not possible. Not at all. Even if you rent it out, the rent cannot cover the mortgage so we are definitely talking about NEGATIVE returns! And kindly explain how the house worth 10m just became worth 60m  numbers please. And remember the discussion here is about mortgage. Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.


Rank: Member Joined: 9/20/2007 Posts: 252

Very informative discussions!
Just a thought, what if one was to accelerate repayment through lump sum payments and clear the mortgage in say 5yrs.
How does this affect the total amount paid?
Can we get real feedback from Wazuans with mortgages not "my friend" tales!
Asanteni


Rank: Newfarer Joined: 5/7/2014 Posts: 40

MaichBlack wrote:knight026 wrote:MaichBlack wrote:What's more @knight026 even with a modest return of 16% p.a. you still end up with 172 million!!! Or a 20 year old house
=FV(16%/12,20*12,100000,0,0)
"Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it."
― Albert Einstein I quoted Kiwaru numbers, at an average of 15% return for real estate, the numbers remain the same. Your assumption is that the person paying the mortgage will just sit in the house he bought, and not sale it even though he knows that its worth more than Ksh 160M Are you kidding me??? Can you kindly illustrate how you get 15% returns from a house you bought on mortgage. Not possible. Not at all. Even if you rent it out, the rent cannot cover the mortgage so we are definitely talking about NEGATIVE returns! And kindly explain how the house worth 10m just became worth 60m  numbers please. And remember the discussion here is about mortgage. The value of the house is independent of how you financed it, mortgage or not. If we say that Real Estate property value will increase by 15% over time, then the value of the 10m house will be ~200m in 20 years: =FV((15%/12),20*12,0,10000000) And since we know from your earlier calculation that the total mortgage payment will be ~31m, I will end up with ~170m of value at the end of the 20 years.


Rank: Elder Joined: 7/22/2009 Posts: 7,341

KenyanEconomist wrote:The value of the house is independent of how you financed it, mortgage or not. If we say that Real Estate property value will increase by 15% over time, then the value of the 10m house will be ~200m in 20 years:
=FV((15%/12),20*12,0,10000000)
And since we know from your earlier calculation that the total mortgage payment will be ~31m, I will end up with ~170m of value at the end of the 20 years.
The value of a house [especially at current] cannot increase by 15% p.a. over a period of time. Land, yes if you get in early in a place that is just opening up. But not a 10m house! You need data to prove the 15% not "if we say...". We can say a lot of things! How much was the price of a house in Buruburu (for example) in the year 2000? How much is the same house going for now? Do the math. Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.


Rank: Elder Joined: 2/26/2012 Posts: 15,974

MaichBlack wrote:KenyanEconomist wrote:The value of the house is independent of how you financed it, mortgage or not. If we say that Real Estate property value will increase by 15% over time, then the value of the 10m house will be ~200m in 20 years:
=FV((15%/12),20*12,0,10000000)
And since we know from your earlier calculation that the total mortgage payment will be ~31m, I will end up with ~170m of value at the end of the 20 years.
The value of a house [especially at current] cannot increase by 15% p.a. over a period of time. Land, yes if you get in early in a place that is just opening up. But not a 10m house! You need data to prove the 15% not "if we say...". We can say a lot of things! How much was the price of a house in Buruburu (for example) in the year 2000? How much is the same house going for now? Do the math. Kwani that house is on the air or water? Any land that has been developed ie with water and sewer line in place even if the hse on it is run down is worth more than land with no infrastructure in place(access to roads etc). I recommend you search for a thread by Gordon Gecko*sp here on wazua, this topic was discussed then "There are only two emotions in the market, hope & fear. The problem is you hope when you should fear & fear when you should hope:  Jesse Livermore .


Rank: Elder Joined: 6/17/2008 Posts: 23,363 Location: Nairobi

MaichBlack wrote:KenyanEconomist wrote:The value of the house is independent of how you financed it, mortgage or not. If we say that Real Estate property value will increase by 15% over time, then the value of the 10m house will be ~200m in 20 years:
=FV((15%/12),20*12,0,10000000)
And since we know from your earlier calculation that the total mortgage payment will be ~31m, I will end up with ~170m of value at the end of the 20 years.
The value of a house [especially at current] cannot increase by 15% p.a. over a period of time. Land, yes if you get in early in a place that is just opening up. But not a 10m house! You need data to prove the 15% not "if we say...". We can say a lot of things! How much was the price of a house in Buruburu (for example) in the year 2000? How much is the same house going for now? Do the math. Highrise Mabagathi Way for a two bedroomed house: 1991  Kes 700,000 2014  Kes 3,500,000 15% pa ni ngumu kupata!!!! ..."Wewe ni mtu mdogo sana....na mwenye amekuandika pia ni mtu mdogo sana!".


Rank: Veteran Joined: 2/3/2012 Posts: 1,317

HassConsult research claims mortgage payments are twice as expensive as rents.
@Maich'Muiru' hebu do the comparison of the same between HFCK mortgage of 14% vs NSE 16% returns vs Faulu FD 9.5% pa.


Rank: Veteran Joined: 11/2/2006 Posts: 1,206 Location: Nairobi

@McReggae thanks for that.We need to know...what was the price of a house say 510yrs ago & the location Vs the current price?Anyone?Various locations? This will help us see whether a house can go up by 15% per year. Formally employed people often live their employers' dream & forget about their own.


Rank: Veteran Joined: 2/3/2012 Posts: 1,317

A mortgage financed house is a loss at current rates even when rented out. "The breakeven rate to create mortgage payments on a par with rentals is 4.7%."  Hass Consult Link


Rank: Elder Joined: 7/22/2009 Posts: 7,341

murchr wrote:MaichBlack wrote:KenyanEconomist wrote:The value of the house is independent of how you financed it, mortgage or not. If we say that Real Estate property value will increase by 15% over time, then the value of the 10m house will be ~200m in 20 years:
=FV((15%/12),20*12,0,10000000)
And since we know from your earlier calculation that the total mortgage payment will be ~31m, I will end up with ~170m of value at the end of the 20 years.
The value of a house [especially at current] cannot increase by 15% p.a. over a period of time. Land, yes if you get in early in a place that is just opening up. But not a 10m house! You need data to prove the 15% not "if we say...". We can say a lot of things! How much was the price of a house in Buruburu (for example) in the year 2000? How much is the same house going for now? Do the math. Kwani that house is on the air or water? Any land that has been developed ie with water and sewer line in place even if the hse on it is run down is worth more than land with no infrastructure in place(access to roads etc). I recommend you search for a thread by Gordon Gecko*sp here on wazua, this topic was discussed then have you seen the houses guys are buying at 10m+ Huko 5th floor. Divide the total land area by the number of units and see how much land you can lay claim to! Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.


Rank: Elder Joined: 6/17/2008 Posts: 23,363 Location: Nairobi

bird_man wrote:@McReggae thanks for that.We need to know...what was the price of a house say 510yrs ago & the location Vs the current price?Anyone?Various locations? This will help us see whether a house can go up by 15% per year. I think Venom estate almost cracks it: 2004: 4.5M 2014: 1618M!!!! ..."Wewe ni mtu mdogo sana....na mwenye amekuandika pia ni mtu mdogo sana!".


Rank: Member Joined: 8/5/2011 Posts: 125

a house is not an asset (fact  in fact when calculating net worth, you are asked not to include the value of your house). This statement applies to birrionaires like Kirubi... pent house Int'l hse, anyone??? For most Kenyans, rent is a real and an escalating cost, that contributes to inflation time and again. Families cannot live on trees. Of course residential houses have levels, kulingana na size ya bollingo!!!
so either... 1) GET A HOUSE, ELIMINATE THAT COST or 2) GET AN ALTERNATIVE INVESTMENT that for the rest of your life will cater for that escalating cost or buy you a house.
Am getting me a house...


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