How much home loan can your salary secure?

In 2001, Imelda Bahemuka, a resident of Kacwamba Trading Centre, was approached by a loans officer to join a financial support group of women. Although she was initially hesitant, she eventually joined the group. After receiving about 10 loans from this group, she had built a good reputation to borrow more money to build her home.

“I used the money to construct two housing units; one completed and the other still under construction which now acts as my social security,” she shares.

Bahemuka is now a strong supporter of housing and home improvement loan policies. The real estate industry has embraced housing loans over time. How affordable are they to the salary earners?

Are they affordable?

According to experts, there is almost no income too little to service a home loan. What is vital according to Boniface Kariyo, a loans officer at Housing Finance Bank, is that one should have a reliable source of income to meet the monthly payments.

“This source of income must be consistent and traceable for it to be used for credit financing,” says Kariyo. 

Rasmash Alele, a relationship manager at Equity Bank says most salary earners are eligible for salary loans for home improvement.

“Anyone who earns as low as Shs100, 000 is legible for a loan depending on one’s need and budget,” he says. He explains that one’s earnings will determine their instalment levels.

Before you get the loan

Before signing up for a salary loan, Alele says you need to have a full budget drawn out to guide you to how much you need.

“A home loan can be used for either improvement or construction. Regardless of the purpose, it is calculated as instalments against one’s net income,” he says.

A home loan should not be mistaken with a mortgage. Home loans by definition are simply bank loans required to purchase real estate, whereas the term mortgage refers to the legal agreement set up between the bank and the borrower that grants them conditional ownership of the property. So, a home loan gives one home ownership, while with a mortgage if for any reason you are unable to continue making payments on your mortgage, your lender can take possession of your home.

Smith Niwamanya, a business banker at Bank of Africa adds that a home loan can also allow for one to purchase land or purchase a fully furnished house.

“Not all home loans are the same. Knowing what kind of loan is most appropriate for your situation will determine how much you get and terms of payment,” he says.

Considerations

Note that there is a lot at play when it comes to acquiring housing or home improvement loans. There are several stakeholders involved from employers, banks, insurance covers, to real estate developers.

“You should have an appointment letter, confirmation, work identity card, National ID, and a guarantor or recommender,” lists Alele.

The recommender he explains should have an account with another bank and be in position to avail their signature and identity.

According to Kariyo, banks not only consider one’s employment contract but also how long they have been on the job.

“One should have worked for at least five years with a company that of good turnover and organised structures also considering how often they lay off employees,” he explains.

Niwamanya advises those interested in getting a home loan to first get a quotation from a seller.  “This quotation should be accompanied by employment documents. Thereafter an analysis of income and the request is done,” he says.

After the property has been approved, the bank then pays 80 percent of the value and the customer contributes the balance portion as a commitment figure to the seller.

In the event that you lose your job?

According to Alele, when one loses their job, the cause of loss is used to determine whether they can access an insurance cover.

“When you happen to lose your job due to unavoidable circumstances of permanent health or termination from restructuring, your insurance takes over,” he says.

What are the interest rates?

Alele says the instalments attract an interest fee of between 18-21 percent depending on the bank’s rates. The expert also says these rates are subsidised to a low percentage in circumstances where your institution has a memorandum of understanding or deals with the bank for employees.

Home loan eligibility

There are several other factors that impact the home loan eligibility apart from the net monthly income. They are as follows:

Age

Home Loans are available for applicants between 21 to 55 years of age, but generally, financial institutes prefer to sanction home loans to the younger population. The reason is that younger applicants have a longer working life and, therefore, the chances of repayment of home loans are high. In the 50s, one may get a lower home loan amount and for a shorter duration.

Employer and work experience

People working in a reputed organisation are more likely to get a home loan as they are considered to be more secure. This gives the confidence of timely payment. Likewise, if you are working in a reputed organisation, then you might be eligible to take a higher amount compared to someone working with not so reputed organisation if all other factors are considered equal. Similarly, your work experience speaks a lot about your stability and acts as a positive pointer in your application.

Credit score

One of the essential factors in determining your eligibility is your past payment track record of loans which is also captured by credit score. Even if you earn a very handsome salary, a poor credit score can negatively impact your chances of getting a home loan. Generally, financial institutes prefer a credit score of more than 650. A credit score above 750 can also give you an upper hand to bargain for lower home loan interest rates.

Existing obligations

Financial institutes arrives at home loan amount eligibility of a person only after taking into consideration their existing obligations with respect to payments and outstanding dues of other loans which they might have availed like a car loan, consumer durable loan, personal loan, credit cards, etc. This is done to ensure that the person availing a home loan is not overburdened with debt and is able to regularly pay.

Loan to value

 Even if you have a higher home loan eligibility in terms of your net monthly income, financial institutes only fund up to 75 percent to 90 percent of the total cost of the property. This is done to ensure they have enough buffer to liquidate the underlying asset and recover their amount in the event of a default.

 Property’s legal approval

In terms of home loans, the health of the underlying asset is of utmost importance. Financial Institutes have two main evaluation criteria for the property which the applicant is about to purchase.

The first one is to examine the legal chain of the property to establish a clear title and ownership and the second one is to determine the market value of the property. Both these evaluations are generally done by independent lawyers and valuers who are appointed by that financial institute.

There are several stakeholders involved from employers, banks, insurance covers, to real estate developers.

How long does it take?

According to Rasmash Alele, a relationship manager at Equity Bank, the bank issues a certain timeframe to customers as repayment period for home loans.

“You can opt for a loan worth Shs30m or Shs40m which will require you to make repayment instalments for a maximum of five years which tenure extends to 10 years,” he explains.

However, Niwamanye says a customer is free to adjust that period.

He says: “The maximum for home loans is a period for 25 years. A customer can decide their tenure considering their net salary, monthly instalments and the total loan they need.”