Cash or mortgage: How should you buy a home?

Buying a home is a major life commitment that should not be entered haphazardly. One of the biggest decisions even if you have enough cash in the bank to be able to buy your next home outright, is whether to buy with cash, get a home loan or mortgage.
Lillian Katiso a, certified accountant and financial management consultant with Zaddock Associates, says buying property with cash is cheaper in the long run because you will save money by not paying interest on a home loan for 20 years. “It also comes with the added advantage of owning your home 100 per cent meaning you are able to use it to access money (collateral) in case of an emergency,” Katiso adds.

Peace of mind
Rogers Katongole, a home owner, notes that one of the biggest advantages of buying a home with cash is never having to worry about losing it just in case one cannot afford to repay their mortgage. “We live in an unstable economy, committing yourself to two decades of payment is a bit unrealistic. Anything could happen to your business or your job which could potentially mean losing the house,” Katongole explains.

He strongly recommends saving enough money to pay cash and live comfortably for the next six months. Echoing Katongole, Judith Owembabazi, general manager Marketing and Product Development at Housing Finance Bank says if one has enough cash, then buying with cash is always a good option.

Go both ways
On the other hand, sinking such an enormous amount of cash in one investment limits one from pursuing other investments as Umar Katumba of Dembe Properties notes. Katumba narrates that on his return from a Kyeyo stint in Japan, he invested all his savings in a three-bedroom house in Seguku.

“I soon realised what a big mistake I had made when I could not even afford to furnish it. I decided to go back abroad for more work but this time I was wiser,” Katumba recounts. Katumba says when he came back; he identified a property he was able to buy with a cash deposit and a mortgage from the bank. “This was the best financial decision I ever made because I had enough money to renovate and rent it out which gave me money to service the loan and more to invest in other properties,” explains Katumba.

Affordability
According to Jackson Emanzi, the head of home loans at Stanbic Bank, borrowing can be considerably more affordable if you do your homework and carefully select not only the bank that best fits your financial status but also choose the exact nature of the loan that suits your need. Emanzi observes that in Uganda today, it is easy to access financing because in a bid to encourage lending and stimulating economic growth, Bank of Uganda has over the past 15 months continuously lowered the central bank rates to a point where it is at the lowest level ever (at 9.5 per cent).

“Most banks, especially the larger ones, will follow the Central Bank’s lead and also reduce their prime lending rates. As a result, the cost of credit will be cheaper and banks more willing to give out loans because they know borrowers are better positioned to pay back the money,” he adds.

The best option
Owembabazi says the best advice when considering whether to pay cash or get a home loan when purchasing property is choosing what gives you a bigger financial advantage by for instance giving you the greater return on your investment.

“If you decide to purchase a house with a loan, make sure you can easily afford the principal, interest, taxes, insurance and other fees each month. And no matter how you pay for a house, make sure to have an emergency savings account equal to six to 12 months of expenses in case your personal economy declines,” she advises

Repayment
Emanzi says home loans usually come with either a fixed or a variable rate attached. As you would expect, a fixed rate remains constant for the length of the deal, so you have peace of mind that your monthly mortgage repayments will stay the same. With a variable rate mortgage, however, the rate you pay can vary, so if interest rates rise, then your mortgage payments are likely to go up as well.

Most mortgages have a five to 25 year term, but when you apply you can choose whether you want to repay what you owe over a shorter or longer term. “Remember that the longer the term you choose, the more interest you will end up paying overall, even though your monthly payments will be lower than if you had chosen a shorter term,” he explains.

Who is legible for a home loan?
Lillian Katiso, a certified accountant and financial management consultant, says the borrower must prove that they have capacity to actually pay off the loan successfully. “So clients vary from salaried employees, landlords, self-employed individuals and Ugandans Living in the Diaspora as long as they have verifiable and regular income,” she says.

Katiso further explains that for salaried employees, one has to earn a minimum of Shs1m every month. To verify income, the salaried employee must provide bank statements dating back six months from other financial institutions, loan Statement (In case you have loans from other financial institutions), three months latest pay slips, appointment letter/letter from employer and tenancy agreements.

A self-employed borrower must provide at least two most recent trading licenses, certificate of registration, memorandum and articles of association, resolution to borrow (Bank format), audited financial books for the last two years, tenancy agreements, rental receipts and proof of ownership for rental income.

Types of mortgages
Outright Purchase: This is applies to all individual customers borrowing for the purpose of acquiring a house. The loan has an (LTV) Loan to Values Up to 125 per cent of the forced sale value (FSV).

LTV refers to the amount of the property’s value that you can borrow.
Buy to Let: This option is specifically tailor made for any individual who is interested in the purchase of residential units/ apartments to earn rental income.
The Construction Loan: This option is geared towards enabling an individual owning land to be able to build their desired home/residential property.

The Completion/Home improvement loan: This option allows individuals who have started construction but need extra funds to finish construction of their residential house. Additionally this option allows individuals to renovate their residential properties.
Equity release: This option applies to a customer who owns a complete titled residential property and would like to get cash release from their property to invest in other legal activities qualifies.
Refinance: This option is ideal for any customer who wishes to transfer their existing home loan and may in addition require additional funding for the above product offerings.