What is a Mortgage?

A mortgage is a loan that involves the use of real estate as collateral. It is usually a loan given by a mortgage lender or bank to help finance the buying of a home in exchange for the cash obtained by the individual to purchase the property. The lender gets the promise and assurance of the individual to pay back the amount borrowed within an agreed time. The property bought acts as the collateral in exchange for the cash borrowed to pay the mortgage. In other words, although the borrower possesses the property, it is the lender that has the ownership right of the property until the borrowed sum is paid in full.

Buying a home

Buying a home is easily one of the smartest financial decisions anyone can make. Firstly, acquiring a home under your name is an investment, as the value of a home usually appreciates. It is considered a physical asset and should you choose to sell, you can attract substantial returns. Another way to look at it is to see the living benefits that having your own space affords you. Not only do you have stability and a sustainable future for you, and your family, it also attracts social and tax benefits as well.

Importance of a mortgage

Mortgages provide an opportunity for individuals who lack enough funds to break down large purchases into smaller parts in order for them to be able to purchase certain properties like houses. There is a two-way risk factor that comes with a mortgage; borrowers are at risk of losing their property when they fail to pay, and lenders take the risk of giving out the loan as there is no guarantee borrowers will pay when due.

How a mortgage works

The money borrowed, the principal, is charged interest on by the bank or mortgage lender until principal and applicable interest is repaid. Typically, the kind of mortgage you apply for determines on what schedule and proportion the interest and principal is paid off.

Types of mortgages

There are two main types of mortgages;

  • Fixed Rate Mortgage
  • Adjustable-rate Mortgage

Fixed Rate Mortgage: In this type of Mortgage, the interest rate is fixed for a number of years. This type of loan usually attracts a high-interest rate.

Adjustable-rate Mortgage: In this type of Mortgage, the interest rate varies all through the duration of the loan. The loan comes at an initial fixed rate for a number of years before alternating annually for the remainder of the loan. This type of mortgage can be a great deal depending on the interest rate environment, but also involves more risk and extra caution is warranted.

How much loan can I afford?

See what you can afford and find homes within your budget.

How to budget for a first-time home purchase

Before you buy a house or any other real estate; you need to know how much you can afford to spend on the property. Also, you need to decide whether to pay for it by means of savings or mortgage.

Secondly, setting a budget requires more than planning out for mortgage loans.

First things first:

  • determine if a home is affordable by calculating your entire debt-to-income ratio. i.e all your monthly expenses divided by your gross income.
  • Factor in other costs that may be incurred during the property purchase process; which may include: owners’ insurance, property taxes, utilities, and renovation expenses.
  • To make the entire process easier, try and make at least a 20% down payment on your mortgage.

*It’s important to include all those extra costs/expenses incurred and any other regular outlay – this will help in avoiding the mistake of double obligation. For instance, a house on paper might seem affordable but when these regular outlays are factored in, the reality hits hard, making it quite expensive.

25% Rule

This states that your mortgage payment for the real estate in-purchase should not exceed 25% total of your gross monthly income

Down Payment

Most mortgage lending banks and companies in Kenya request for at least 20% down payment, some ask for minimum 25%, while minority ask for 0 – 10%.

When it comes to down payment; here’s a golden tip: The more the down payment, the less the interest you’ll pay for the loan’s amortization period. And also, the lesser your monthly mortgage payment – even if Mortgage Insurance is involved.


Choose Property befitting your affordability

Not only are you looking for a property you can buy but one that you can maintain also. Location is key. For instance in Nairobi – is the traffic jam an issue you can deal with? Security-wise how is the general neighborhood like? What type of property are you looking for? Maintaining an apartment unit is not the same as a Mansion in Karen.

What’s the current state of the property like? Utility costs, fixing the lawn, maybe putting up a fence, if not connected to the county sewerage system, factor in exhauster services costs, is water access an issue,

Be Realistic as possible in terms of what you can handle as a property owner.



If you miscalculate, home ownership can be a nightmare. as a first-time buyer you have a list of wants to be met by the property in question, but can you cost-out he entire process upfront?


Highest Debt:Income Ratio a borrower can lend a mortgage in Kenya


Rent their homes, as of 2018


Highest Debt:Income Ratio a borrower can lend a mortgage in Kenya

Home-Buying Formula by Dave Ramsey


1. Start By adding up every source of income per month

2. Write down your monthly expenses, that are non-house related.

3. From the sum left, by deducting your monthly expenses from the income source.

Dave recommends to keep your mortgage monthly payment below 25% of your total gross income per month.


Also, don’t forget to save a little extra each month, to cover regular maintenance costs.

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