Pay back whenever you can

Kenya’s formal mortgage market has rightly been described as “elitist”, meaning it only caters for the “haves”, but ignores the bulk of the population.

That bitter truth was formally brought home by the Central Bank of Kenya and the World Bank in a report they jointly released last year.

The study showed that the mortgage market is still relatively small by international standards, with only 13,803 loans.

According to the report, while the mortgage business has been growing steadily at 14 per cent annually, the loan portfolio remains small.

A keen look at recent developments in this market reveals something else: that mortgage firms remain strict in their approval assessment, but continue to come up with innovative and flexible products.

Market experts say that flexible mortgages are among some of the new mortgage packages that have been created to cater for the modern-day market.

“Today’s mortgage market has become more exciting and this has led to an increase in the variety and diversity of mortgage packages being offered to borrowers,” says one expert from a leading mortgage firm.

But what is a flexible mortgage? Simply put, a flexible mortgage is one that allows the borrower to make extra repayments when they have the extra money and even reduce or skip payments should the need arise.

Making extra payments helps to reduce the amount outstanding on your mortgage, thereby reducing the interest you’re supposed to pay or allowing you to pay off your mortgage earlier than planned.

You can also buy yourself more time when money is tight by reducing your monthly repayments or increase you mortgage if you need to borrow money.

Borrowers whose income includes a significant but seasonal income, for example, might make use of seasonal payments to make overpayments, thereby reducing the term.

In places like Australia, where flexible mortgages have become popular, these products are designed for people who want the option of varying their mortgage payments to match changes in their cash flow.

Firms can let you underpay, overpay, take payment holidays, pay off in lump sums and borrow back over-payments.

According to John Mussi, the founder of Direct Online Loans, which helps UK homeowners find the best available loans, flexible mortgages come in various guises but they mainly allow you to make extra lump sum payments, borrow back money, take repayment holidays and also make underpayments.

Some flexible mortgages, he says, will double up as a current account, where your salary is paid in monthly and so you are, in effect, paying off a huge overdraft.

“Unlike some traditional loans that still charge mortgage interest on an annual basis, fully flexible mortgages calculate interest daily, which means that any overpayments you make are immediately credited against your loan, thus reducing your interest costs. This gives you the flexibility to manage your mortgage payments to suit your cash flow needs as your circumstances change,” he says.

In Kenya, Housing Finance has introduced a cyclical mortgage product which is flexible to individual circumstances.

This will be especially useful to self-employed borrowers and those with a variable income since they are not penalised for additional capital repayments or if payments are not made monthly.

The mortgage provider says that with its all-in-one design, this product can save clients a significant amount of interest while it speeds up their debt reduction.

In addition, since it frees up money on a monthly basis by helping clients to smooth out monthly cash flow and lower their debt costs significantly, it can help clients to increase their investment activities.

According to Housing Finance, flexible mortgages are particularly suited to today’s lifestyle, where jobs for life are virtually non-existent.

It is also an attractive option for those either in business or planning to change from a full-time career to run a personal business.

“Housing Finance’s cyclical mortgage product offers flexible repayment terms to match a customer’s business cash flow, either on quarterly, semi-annual or annual repayment,” the firm says on its website.

“The cyclical mortgage and Makao (another product) present vastly different risk profiles, requiring risk management skills that do not naturally emerge from disciplines and training associated with traditional mortgages.”

The Makao concept was recently introduced to provide potential home owners with a one-stop solution.

Here, Housing Finance, in conjunction with a consortium of professionals in the building industry, manage the whole property acquisition process on behalf of the prospective owner.

The mortgage provider says that the risk profile of the mortgage industry is changing in response to customer preference.

“Customers are demonstrating, more than ever, their increasing expectations of personal service and a mutually beneficial relationship with their financial institutions.”

According to Mussi, if you are looking for flexibility in the current mortgage market, there are two important facts to bear in mind.

First, the majority of flexible mortgages tend to charge higher rates than those available on more conventional mortgage deals.

Secondly, there is little difference between mortgages marketed as fully flexible and conventional mortgages which are offering an increasing number of flexible features.

So, unless you want to use the full range of features offered by a flexible mortgage, you may find the level of flexibility you are after on a conventional deal at a much better rate.