Mortgage finance still remains a very popular way to buy a house. In spite of the economic challenges our country faces with the great uncertainty there’s still a school of thought that encourages the use of mortgage finance. So if you’re considering it this article will help you look at some factors you need to consider.
Mortgage – how it works
When a person commits to enter a mortgage agreement with a provider, the provider pays for the property upfront and the home buyer pays regular installments over a long haul up to 30 years. For the purposes of this article we will limit it 20 year mortgages. The regular payment is firstly applied to outstanding interest and the remainder goes towards reducing the outstanding principal. The technical term for this amortization.
Assume you owe 200000 and your interest rate is 10% per annum and over course of the year your payments amount to 24000, of that 24000 the first 20000 goes to your interest and the remaining 4000 reduces your outstanding to 196000.
We covered house prices recently so we will use the research in that article as a backdrop to our discussion here. With continued price increases the housing market has not been spared from this. In order to provide a useful analysis we will use RTGS pricing in our calculations. Where RTGS is accepted they tend to accept at the US dollar price at the prevailing rate of the day For this discussion we will use parallel market rate for prudence’s sake0. I’ve used the Pockock Property mortgage calculator to get estimated repayment amounts. In both cases below we will assume a 20% down payment on the mortgage.
Assuming a salary of a entry level employee who earns $800/month & wants to buy a high density house. We shall use the Budiriro house in the aforementioned article which is valued at US$25000. 25000*3.9=$97500 RTGS price.
Middle level employee eg Engineer who earns $3000/month and wants to buy a medium density property. We shall use the Westgate house priced at US$125000 = 125000*3.9=$487500 RTGS price.
As we can see the rates of interest make these mortgages unaffordable for the examples we’ve chosen above. While the salaries we used were arbitrary they are reflective of prevailing salaries in Zimbabwe. On an affordability level alone mortgages may be out of reach for many even those gainfully employed.
Repayment in RTGS
With the loan and repayment being denominated in bond (RTGS) the repayments would also be. For someone earning US dollars from say another source of income there’s an opportunity that does present itself. With the continued devaluation of the bond to the dollar the repayments in dollar terms would continue to get cheaper.
Recall back to hyperinflationary times of the late 2000s where the rate of the Zimbabwean dollar (bearer cheque) moved daily. Such was the rate of depreciation that amounts which were insurmountable in one month would be spare change the next. Using the above repayment amounts had you taken out a mortgage a year ago you’d be experiencing declining repayments in dollar terms. Through a practice referred to as burning one could find repayments declining as the rate goes up.
US$:Bond rate February 2018 approximately 1.25
US$:Bond rate February 2018 approximately 3.9
So in the event that you could afford the initial payment at this point all other things held equal you could pay 3 times the amount towards repayment and this will effectively shorten the mortgage term. Banks do have what they call prepayment penalties which effectively penalise you for paying off your mortgage ahead of time but in this case it would still be in RTGS so the effect is negligible at current rates. Since the introduction of the RTGS$ rates have somewhat eased and this of course has the opposite effect on the price in dollar terms. Whether this easing is sustainable or not is another debate altogether. The optimistic view would be that things cannot get any worse in our economy but we surely know better. A mortgage in these precarious times is a risk that must be carefully considered.