Why Insurance is a critical aspect of your mortgage

A mortgage on a home is one of the largest debts most Kenyans incur, and indeed needs to be taken seriously.

Mortgage holders need to take steps to protect their family home in the event that payments cannot be met due to death, illness or disability.

Mortgage insurance is today a compulsory financial agreement that insures the lender against loss in case the borrower fails to pay his or her mortgage. The borrower normally pays for this insurance. 

An initial premium will be collected during the closing of a mortgage deal and depending on the chosen premium plan; a monthly payment may be included in the payment of the house made to the mortgage lender. 

 

The mortgage lender then remits the payment to the insurance firm.  The cost tends to vary depending on the size of the down payment of the home loan.

This type of insurance is beneficial to a homebuyer since it allows them to become homeowners sooner and tremendously increases their buying capacity. 

Introduction of mortgage insurance has ensured that lenders keep the down payment for the purchase price of a home low, which means you will take a shorter time to save for your dream home.

Mortgage insurance has given lenders the necessary comfort to offer bigger loans to individuals. Lending money for mortgages is today less riskier for most banks and for mortgage meaning lower and more stable interest rates. For the borrower, taking mortgage insurance will ensure the mortgage will be paid off in full, in the event of the homeowner's demise or permanent disability. 

 This kind of insurance also plays an important role in home ownership. Without mortgage insurance, many will not be able to qualify for a loan to acquire a home.

While some view it as an extra burden on the homeowner costly, it is a means of securing a mortgage and getting you closer to the home of your dreams.

Without paying the mortgage insurance, home owners will find it difficult to purchase a home or utilize their home equity. So, what a borrower may consider as a disadvantage is actually the approval factor for their loans.

Furthermore, the insurance covers your mortgage payments as the borrower in case you are unable to pay for your monthly mortgage due to illness, injury or long-term unemployment. Mortgage insurance also has the added benefit of protecting your investment as well.

It is recommended that home owners also take insurance policies that cover structures on a property, including homes and out buildings, as well as personal items, such as furniture, electronics and clothing. Homeowners insurance pays for damages and loss caused by fire, weather among other perils.

Mortgage insurance has helped overcome traditional barriers to financing. More and more homebuyers who may not have qualified for a mortgage are benefiting from mortgage insurance for example, those who are self-employed or with seasonal incomes.

With mortgage insurance, people who have maintained a good credit but might not meet conventional lending criteria can qualify for the financing they need.

Disclosure of underlying health conditions is important when applying for coverage as benefits may be denied if full disclosure was not made. However today you can take a mortgage without taking a medical examination as a result of mortgage insurance – although limited to Kshs 12.5 million in the case of Housing Finance.

Mortgage insurance protects the homeowner who suffers a severe illness that is covered under the policy such as life threatening cancers, HIV, heart attack, stroke and kidney failure.

Mortgage insurance provides peace of mind for you, knowing that your family lifestyle can continue without additional difficulties. 

By David Maveke, General Manager - Mortgage Finance at Housing Finance

How to improve your chances of qualifying for a mortgage

Before any mortgage lender can grant you a loan to purchase your dream home, they would like to make first sure you have the ability to repay. 

Your finances will be scrutinized carefully, many questions are asked and plenty of papers to fill out and sign before you know if the house you have your eye on, can be yours.

Lenders will need to consider your personal finances very carefully before making a decision. Your ability to qualify for a mortgage loan will depend on capacity to repay the debt; it depends on your earnings and employment history, expenses, number of dependents, and other obligations you have.

The amount of cash you have for a down payment and settlement costs, as well as cash reserves to deal with expenses that may arise after you're in the home will also be considered in the application stage.

Finally, the mortgage firm will require a down payment   the mortgage which varies from one lender to another.

Also considered is your Credit history - how much you owe, how often you borrow, if you pay your bills on time, and if you're living within your means.

The licensing of Credit Reference Bureaus is expected to improve the speed of risk assessment and ultimately lead to reduced lending and administrative costs. Maintaining a good credit history will go a long way in enabling you to qualify for a mortgage.

Most lenders want to know your monthly expenses and savings culture to confirm if indeed you have the discipline to commit comfortably a mortgage.

For many Kenyans the journey to home ownership is mainly halted by the inability to raise enough capital to kick start the mortgage process.

The government and private sector has responded to this need by introducing a host of new incentives aimed at making home ownership easier for the ordinary Kenyan.

The risk profile of the mortgage industry is changing in response to the demand created through customer preference.

The modern mortgage market has become more creative, and therefore this has led to an increase in the choice and diversity of mortgage packages being offered to borrowers.

By investing in a pension scheme for example, you are increasing your chance of qualifying for a mortgage. The government has today allowed customer to assign up to 60% of their accrued retirement benefits to acquire the home of their dream.

Housing Finance, for example, has introduced solutions that not only allow the client to get financing for their home using their pension, but also cater for the upfront mortgage payments such as the down payment, stamp duty, valuation and legal fees, which are often stumbling blocks to home ownership.

Another major challenge facing most home owners is the ability to have enough income to support the monthly mortgage obligations.

This challenge has been partially addressed through new solutions that allow mortgage financiers to consider supplementary income in the qualification stage.

Today Housing Finance is addressing the needs of those currently in business or planning to change from a full time career to running their own business.

The journey to homeownership starts with financial discipline. By opening a Home ownership Savings Account, you not only enjoy tax benefits as you save for your first home, but it also enables the mortgage firm to better understand your finances, which eases your mortgage application process.

By taking advantage of existing incentives and cultivating a good savings and spending culture, it will be possible to own your dream home sooner than later.