Uganda’s Mortgage Financing Questions Answered

Understanding Uganda’s Mortgage Financing: Questions and Answers

1. What is a mortgage?

A mortgage is a loan obtained to purchase a real estate property. Investopedia defines a mortgage as “… a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments.”

The “mortgage” itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.

2. What is a Mortgage Loan to Value (MLTV) how does it determine the size of my loan?

The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific MLTV limit. For example, with a 95% MLTV loan on a home priced at UGX 50,000,000 you could borrow up to UGX 47,500,000 (95% of 50,000,000), and would have to pay, UGX 2,500,000 as a down payment.

The MLTV ratio reflects the amount of equity borrowers have in their homes. The higher the MLTV the less cash home buyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, higher MLTV loans (80% or more) usually require mortgage insurance policy.

3. What types of mortgage loans are available in Uganda and what are the advantages of each?

— Fixed Rate Mortgages:

Payments remain the same for the life of the loan or mortgage.

Types:

• 15-year
• 30-year

Advantages

• It is predictable—Housing cost remains unaffected by interest rate changes and inflation.

— Adjustable Rate Mortgages (ARMS)

Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits

Types

• Balloon Mortgage – Offers very low rates for an Initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is clue or refinanced (though not automatically)
• Two-Step Mortgage – Interest rate adjusts only once and remains the same for the life of the loan ARMS linked to a specific index or margin

Advantages

• Generally offer lower initial interest rates
• Monthly payments can be lower
• May allow borrower to qualify for a larger loan amount

4. When do Adjustable Rate Mortgages (ARMS) make sense?
 

An ARM may make sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren’t concerned about potential increases in interest rates.

5. What are the advantages of 15- and 30-year mortgage loan terms?

The term of your loan should depend on the nature of your business and the purpose for which you need the loan.

Longer-term loans are usually preferable on the basis of ‘time value of money.’ You must undertake a cost benefit analysis on the costs of the loan (interest) and the incomes from the business for which it finances to ensure it the terms are reasonable for your business success. The incomes from the business for which it finances to ensure it the terms are reasonable for your business success.

30-Year Mortgage Loans

In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions. As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.

15-year Mortgage Loans

The Mortgage Loan is usually made at a lower interest rate. Equity is built faster because early payments pay more principal.

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6. Can I pay off my mortgage loan ahead of schedule?

Yes! By sending in 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.

When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.

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.

7. Are there special mortgages for first-time home buyers?

Yes! Lenders now offer several affordable mortgage options which can help first-time home buyers overcome obstacles that made purchasing a home difficult in the past. Lenders in Uganda may now be able to help borrowers who don’t have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.

8. How large of a down payment do I need?

There are mortgage loan options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you’ll have.

Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you’ll also need money for closing costs, moving expenses, and – possibly -repairs and decorating.

9. What is included in a monthly mortgage payment?

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

10. What factors affect mortgage payments?

The amount of the down payment, the size of the mortgage loan, the interest rate, and the length of the repayment term and payment schedule will all affect the size of your mortgage payment.

11. How does the interest rate factor affect in securing a mortgage loan?

A lower interest rate allows you to borrow more money than a high rate with the some monthly payment. Interest rates can fluctuate as you shop for a loan, so ask-lenders if they offer a rate “lock-in “which guarantees a specific interest rate for a certain period of time.

You need to clarify this from your financial institution. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.