Releasing your home equity!

Due to population pressure, Uganda has experienced a house boom. You need to release equity from your home. FILE PHOTOS.  

By Kenneth Atugonza
Posted  Thursday, February 24 2011 at 00:00

 

Your equity in an asset is the portion or share you own outright. For example, if you have a house with no mortgage, your equity in the house is 100 per cent.

However, the equity value is tied-up and for it to be turned into cash you have to release it by selling the property or borrowing against it.

Most Ugandans own their homes outright. This is partly because many purchased/constructed them without securing a mortgage thanks to the lack of variant mortgage products in the past.

These houses (especially in and around Kampala) have greatly appreciated in value because of the high house inflation fuelled by population growth, a robust economy and the East African integration. However, in retirement, the home owners are likely to have low incomes thus being asset rich but income poor.

Because the home is the most valuable asset they are likely to have, equity release may become a temptation although this may go against the tradition of passing on the house to their children as an inheritance.

Options of releasing your home equity to meet your financial needs may include, selling your house and using some of the proceeds to buy a smaller house that is cheaper.

This is known as downsizing and is especially appealing if the children have grown up and left home.

The remainder of the money is used to meet your financial needs and the smaller house is also cheaper to maintain.

If your house is not necessarily big but is located in a prime area, you can sell and buy another property in an upcoming area. This again will enable you to raise money for your objectives, be it, to start a business or fund your children at university yet being able to purchase another home.

It is important however to be very selective of where to buy your new property because its future value will greatly depend on the neighbourhood and its access to amenities.

You may opt not to release equity from your property but use it to get a second mortgage to meet pressing needs like paying for health-care or home improvements.

This should only be considered if you have a secure income and can afford the loan repayments. Otherwise failure to service the two mortgages will put your property at risk.

A good point to start is to look at the household budget with the aim of highlight the disposable income available.Getting a second mortgage will only be plausible if you are not borrowing for consumption and are in need of a sizeable amount of money.

It makes sense because a mortgage is the cheapest form of borrowing. However, some people are borrowing on a short-term basis paying 20 per cent interest per month. When this rate is annualised, you are actually borrowing at 240 per cent compared to around 16 per cent annual rate (varies with different banks) you would pay on a second mortgage.

If on the other hand you have a mortgage but with little equity and can do with more disposable income, you can explore the possibility of remortgaging. Remortgaging is not taking out money (equity release) but switching to a cheaper lender. With more banks offering mortgages, there is growing competition and this is likely to result in cheaper mortgages (lower interest rates). 

A difference of one per cent results in huge savings (millions of shillings) on the cost of your mortgage. You should however check the charges you may incur and whether the gains from switching are worth it.

You may also consider extending your existing mortgage so that you have a longer period to repay it. Your repayment amounts will be lower leaving you with more disposable income although it ends up costing you more in interest paid.

Or else, explore the possibility of sub-letting part of your property (quarters/guest wing) to provide you with an income.You may however, need some money for house adaptations to upgrade its standard so as to levy a good rate. Looking at the UK, many pensioners’ incomes are not sufficient for all their needs partly because of the high cost of living. 

As a result, the market has developed equity release schemes designed specifically for retirees that are asset rich but income poor. An example is a lifetime mortgage. With this mortgage, no repayments (servicing the mortgage) are made during the mortgage term but interest is rolled-up and paid back with the capital amount when one dies (or at the end of the agreed period).

Because you pay interest on interest already accumulated, one can opt to draw the amount agreed in stages (as and when required) so that he/she reduces the interest paid.

An alternative is to sell the house but continue to live in it till you die. This product is known as the home reversion scheme.

You are however not paid the full value of the home (it is at a discount) because the buyer has to wait for some time to possess the property.

Whatever your age, investment in property has proven to be the surest investment vehicle because land and property appreciate in value overtime and in Uganda’s case, this appreciation is accelerated due to a high population growth and a robust economy.

Kenneth Atugonza MBA, MSc Finance.
kennethatugonza@gmail.com