MORTGAGE FINANCE:
Before You Say I Do ...Cont'd
An asset puts money in your pocket. For a house to be an asset, it means you are renting it out, and after paying all the bills (mortgage, insurance, maintenence bills, tenement, agency etc), you still have a net positive cash flow, that is, you have something left to smile to the bank every month after your tenants have paid, and you have settled everyone, then you have an asset.
If bills go up, you can always increase your rent, depending on the prevailing rent in that area.
Forthly, the mortgage rate and terms can make a mortgage a good idea or a bad one. Some mortgages are fixed rate mortgages. In this scenarion, the interest rate is fixed throughout the duration of the mortgage. In a variable rate mortgage, the interest rate changes based on Central Banks base rates formerly known as MRR (Maximum Rediscount Rate). Each has it's pros and cons. In a fixed rate scenario, if interest rates go up, you gain, and it goes down, you lose.
In a variable rate scenario, you can take the mortgage when the rates made sense to you at that time, and midway, it goes through the roof. Of course you always have the option of selling the property and baling out, if you can afford that luxury. Again, if you have tenants, and rents are going up, you can hike up your rent to recoup your high mortgage payments.
The interest rate can determine if it makes sense to rent or buy. At 4% obtainable abroad, it 30 years, you would have bought the bank 3 houses by the time you finish paying. At our prevailing rate of 19%, unless you are expecting a windfall soon, and the bank agrees that you can exit the mortgage anytime without a penalty, you will be working for the bank.
If you take a mortgage at 19% and build to rent, the rent from your tenant will not cover your mortgage unless you rent to blue chip companies, or expatriates who pay in dollars.
Let's say for example, you take a N50M mortgage to build/buy a block of four flats in Maryland, Ikeja for renting out. At a mortgage rate of 19%, buy the time the bank hits you with admin, legal charges etc, we are looking at something like 23% per annum if not more. Now your interest payment alone per annum is a hefty N11.5M. You have not started paying back the money yet. Now, who will you rent the property to, to cover the interest payments alone, not to talk of paying down the loan?
Let's say the rate was 4% like in the UK, your interest payment will amount to N2M. Such a property, if residential still makes no sense in Ikeja, unless you uproot it and plant it in Ikoyi, VGC, Victoria Island, Banana Island etc. Then you are in business.
So you can get your fingers burnt in a mortgage. You have to do your due diligence before you leap.
So when it comes to mortage financing, before you say "I Do", look before you leap. Seek expert opinion.
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