- Your house is an investment, a piece of property that should do more than just shelter you. If you want to maximise its financial potential, start thinking along the lines of equity release
Because of its long-term nature and the high repayment amounts involved, a mortgage normally ties down the takers financially, often making it difficult for them to qualify for another loan.
But that need not be the case since banks are increasingly coming up with products that ensure that those who hold mortgages are still able to borrow substantial amounts of money for other purposes.
One such measure is known as equity release, which is becoming popular with property owners, especially as a result of the current rates of property value appreciation.
“Equity release takes advantage of the growth of the value of your home over time,” says Ms Caroline Kariuki, the managing director of The Mortgage Company, a Nairobi-based mortgage brokerage firm. “It gives you access to the additional value that your house has created over time to do other things.”
This is what she means: suppose you took a mortgage five years ago to buy a Sh5 million house in Nairobi. If you valued that house today, it would be worth something in the tune of Sh10 million, thanks to the high capital appreciation of real estate in Kenya over the past decade.
Now, the Sh5 million appreciation in the value of the house plus what you have repaid the lender so far constitute your equity in the property.
In other words, property equity is the difference between the current value of your home and what is outstanding (if you are still servicing a mortgage).
You can secure a bank loan based on this accumulated equity. That way, you are said to “release” equity in the property.
Thus, equity release can be described as a way of raising money against the value of your home.
If you have a house with no mortgage — maybe because you constructed it with your own money or because you have cleared the mortgage on it, your equity in the house is 100 per cent.
But the equity value is tied-up and can be turned into cash when you either sell the property or borrow against it.
Property owners usually turn to equity release when they want to meet other financial needs like paying school fees, starting up a business, furnishing a house, or even going on holiday.
“The good thing about equity release is that it is very flexible in terms of how you use the money. The repayment is usually based on your current income or salary. It is just like another mortgage, but you are using the additional value of your property to do something else. The rate is usually the same as a normal mortgage,” explains Ms Kariuki.
Mr George Laboso, the head of mortgages at Family Bank, says equity release is becoming popular.
“The uptake is very good. That is why you see banks advertising it.”
CfC Stanbic Bank, for instance, has for the past few weeks staged a major equity release advertising blitz in the press. Calling it Property Owner Loan, the bank promises home owners a loan of up to 90 per cent of the value of their properties. The loan, says the bank, could be used for school fees, medical expenses, or even for buying a new car.
Just sitting there
This method, explains Mr Laboso, is suitable for those who have paid off their mortgage and now have the house “just sitting there”.
“If you need some cash to buy, say, a piece of land, you can charge the property and release its value. If your house is worth Sh30 million, for instance, you could borrow Sh10 million. However, whatever you borrow must not exceed 90 per cent of the value of the property,” says Mr Laboso.
At Family Bank, he says, their equity release philosophy is simple: “If you already have a mortgage with us and you have a short-term need, say, you need a quick Sh2 million, we release the money to you.”
And no player wants to be left behind on home equity release. “As you repay your mortgage, you acquire equity in that property which can be transferred to you for further property development or other uses. We can lend you money on the value of your own equity,” says Housing Finance on its website.
Equity release also allows borrowers to top up their mortgages. For example, if you took a Sh5 million mortgage and now have an outstanding balance of Sh3 million, you could “reinstate” the Sh5 million loan by borrowing another Sh2 million to fulfil other obligations on the basis of the accumulated equity (the appreciated property value and the Sh2 million already paid).
Sometimes, equity release can be used to finance a new project. But in that case, the project backer must have another property that will be charged together with the one being constructed.
Ms Kariuki explains: “Sometime back, I got involved in a project where the customer didn’t have a cent. So we did an equity release on their property and they were able to get 100 per cent financing for the project. We had to charge two properties — the one they were constructing and the one they already had — for the equity release transaction to be possible.”
According to Mr Godfrey Mutuma, the chairman of Valuation and Estate Management Surveyors, a chapter of the Institution of Surveyors of Kenya (ISK), the idea of equity release came about five years ago “after banks realised that they could do more than just give out mortgages”.
However, its popularity started rising two to three years ago.
“The concept of home equity release was non-existent in Kenya until about five years ago. But it has now picked up. Every so often we are called upon by banks to do property valuations for equity release,” he says, noting that until three years ago, valuations were mainly for “normal mortgage financing”.
Describing it as creative thinking on the part of financiers, Mr Mutuma says equity release presents property owners with a no-hassle-fundraising option. “It is a very convenient way of getting finances to do other things, especially for someone who already has a mortgage.
“Normally, by the time you finish building a house, you are left so drained financially that you might not even be able to furnish the house. Products like home equity release, thus, come in handy when you want to furnish or finish putting up the building,” he says, adding that the loan is also helpful in situations where returns from a property are low.
However, he says property owners should be careful before going for this type of loan as they may overburden themselves, especially those who are still repaying a mortgage.
“Do not let equity release drain you financially,” he warns, adding that one must keenly assess one’s ability to repay the loan and the mortgage.
The main drawback of equity release, says Ms Kariuki, comes when the money is not used for the intended purpose.
“Diversion is the biggest risk,” says the adviser who has been in the mortgage business for more than a decade.
She concurs with Mr Mutuma that servicing an equity release loan alongside a mortgage can be strenuous and advises: “You need to ensure that you have sufficient income to support loan repayment, otherwise you can get into a stressful situation.”
Does age matter? Yes (some insurers do not insure mortgages taken by people who have advanced in age). However, some banks accommodate older people based on their level of income.
“If you have a profitable business, we can work with you irrespective of your age. But the source of revenue must not be dependent on you (it should not be a salary) so that in the unfortunate event that you pass on, your estate or business would continue servicing the loan. It should be business income or rental income, which the bank will be able to receive even after you have gone,” says Ms Kariuki.