Everything you need to know about mortgages

A mortgage is a loan obtained with the aim of purchasing real estate. The mortgage acts a legal claim on the home/property. Mortgages have two features in common: principal (sum originally borrowed), and interest. There is a lot more about how mortgages work, however, as this Q&A with the Uganda Bankers Association explains.

What types of mortgage loans are available and what are the advantages of each?

There are two main types; Fixed Rate Mortgages and Adjustable Rate Mortgages (ARMS). In the case of the former, payments remain the same for the life of the loan or mortgage. These are 15-30 years long with the advantages being that they predictable and costs remain unaffected by interest rate changes and inflation.

For Adjustable Rate Mortgages, payments increase or decrease on a regular schedule with changes in interest rates, with increases subject to limits. The types include Balloon Mortgage – which offers very low rates for an Initial period of time (usually 5, 7, or 10 years) and when time has elapsed, the balance may be refinanced (though not automatically). The second type; the Two-Step Mortgage is one where the interest rate adjusts only once and remains the same for the life of the loan.

The advantages of the ARMS is that they generally offer lower initial interest rates, monthly payments can be lower, and they may allow the borrower to qualify for a larger loan amount.

What are the steps taken to secure a mortgage loan?

The first step in securing a loan is to complete a loan application form. To do so, you will need the following: an account in the bank you are going to borrow from, pay stubs (income slips) for the past three months, a financial card (a credit report about the applicant from the Credit Reference Bureau), information on long-term debts, recent bank statements, tax returns for the past two years, proof of any other income, address and description of the property you wish to buy and a sale contract. During the application process, the lender will order a report on your credit history and a professional appraisal of the property you want to purchase. The application process typically takes between 1-6 weeks.

How do I choose the right financial institution for me?

Choose the Bank you want to borrow from very carefully. Look for financial stability and a reputation for customer satisfaction. Be sure to choose a bank that gives helpful advice and one which makes you feel comfortable.

Are there special mortgages for first-time homebuyers?

Yes. Lenders now offer several affordable mortgage options which help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who do not have a lot of money saved for the down payment, have no/or poor credit history, long-term debt, or have experienced income irregularities.

How large a down payment do I need?

There are mortgage options available that only require a down payment of 5% or less of the purchase price. In this case, for a home priced at Shs180m, you could borrow up to Shs170m, meaning you would have to pay Shs10m as down payment. But the larger the down payment, the less you have to borrow. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan.

What is included in a monthly mortgage payment?

The monthly mortgage payment mainly pays off principal and interest. Most lenders will include local real estate taxes, homeowner’s insurance, and mortgage insurance (if applicable).

Can I pay off my mortgage loan ahead of schedule?

Yes. By depositing extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. Most lenders allow loan prepayment, although you may have to pay a prepayment penalty to do so. Always ensure that your loan agreement provides for the option of making extra payments in case of good cash flows on your part are accepted to reduce on the principal, as some banks don’t accept them since they affect the budgeted interest income on the loan.