Continue to pay rent or get a mortgage

Dele and his wife just got back from a friend’s house warming where they had so much fun eating, drinking and sharing jokes. They share a special bond with their friend and couldn’t be happier seeing their friend fulfill a livelong dream of owning a home. Dele had thought about buying a home too and quit paying the N2m he pays annually in house rent.

However, to own a home like his friend he will need to cough out like N16m

in equity and pay as much as N350, 000 monthly in mortgage payments for N25m loan. He just needs to be patient and doesn’t need to be under pressure. But as Dele lay down to take a nap after a long day, his wife whispered to his ear “when are we going to buy our own home”?

This is one question you have to face several times in your life provided you live in a rented apartment. In an economy like Nigeria, owning a home (which for this article I will attribute to house bought for the owner to live in) is difficult. This makes owning a home versus paying a rent argument very dicey. Do you continue to pay rent or do you take out a mortgage? Here are my thoughts.

Do you qualify for home ownership schemes?

Home ownership schemes like the National Housing Fund are government-sponsored schemes that can help you buy a house via mortgage and an affordable interest rate. It also allows you purchase a house that is commensurate with your income. Based on this, many ‘middle class’ earners don’t find this option very attractive because the home you probably buy is either on the outskirts of Lagos or in some remote area. If you would rather live in Surulere instead of Mowe then you are probably better off paying rent till you can earn enough salary to get you a house in your preferred neighbourhood.

Do you have equity to deposit?

Before you take out a mortgage it is very likely that you will be asked to deposit some equity. Equity deposits in mortgages can range from 20 per cent to 40 per cent. Assuming the house cost N15m and we use the top percentile, you get to deposit N6m. Not many earn enough legitimately to enable save this kind of money. If you are to rely on your legitimate income then this may just take you years of painstaking savings to achieve. If this is your situation, then renting an apartment is the logical option until you get an alternative and legitimate source of income that can augment.

Can your income pay off your mortgage?

Whilst obtaining a mortgage is one thing, paying it off is another kettle of fish. Using the example above, after contributing N6m in equity you will still need to borrow N9m as equity. Applying an average lending rate of 16 per cent per annum for 20 years gives you a monthly repayment of N125, 213. A rule of thumb suggests your mortgage should be no more than 20 per cent of your take home pay at the most. Based on that, your monthly take home pay should probably be about N626, 065. This is by no means an easy structural adjustment for you and your family as you have just over N500, 000 to cater for feeding, school fees, clothing, savings etc. Surely, you do not expect to remain in this income bracket for long so my expectation is that you should earn more with time.

So, if you check that your income can in no way pay off your mortgage for the kind of own you desire, then you are better of renting an apartment till you are capable of taking out the ideal mortgage.

What is your interest rate?

Except you are borrowing through the NHF, interest rates on mortgages often come in double digits. Before you commit to borrowing, you should ask your bank for an amortization schedule where you should input your interest rates and work out the best rates that should suit your income profile. Banks are hardly flexible with rates; however understanding the rates that suits you should help in selecting the ideal bank. If double-digit rates are too punitive for you then I suggest you seek for cheaper government sponsored mortgages.

How quickly can you pay off your mortgage?

Some people like to obtain the mortgage first and then figure out an exit plan later. This is a good plan provided you actually do figure out that exit plan or you face the consequences that arise from a default. An exit plan begins with identifying when you actually want the mortgage paid off, if you do not want to wait out the entire duration of the loan. For example, rather than wait for 20yrs to pay off the N9m loan you can actually pay it off within 10 years or shorter by crashing the loan through bulk payments at regular intervals. Just make sure there is no penalty for early repayment when signing the loan agreement.

Finally

Whilst most understand the difference between renting an apartment and getting mortgage, the similarities are not usually buttressed. For example, whether you pay rent or get a mortgage you still end up paying money to someone. Its either you pay a landlord or you pay a bank. Another is that you get kicked out of the house if you don’t meet your obligations.