15 November 2012

Namibia: Home Ownership


Many people run into financial problems after acquiring a house of their dream. They only discover after settling in the new house that they have no extra money left to pay for household expenses, emergencies, go on holiday, and save for the future, because the house payment is too large.

What was supposed to be a dream house becomes a prison, and many couples remain in these prison houses until retirement or death. For others, acquisition of a dream house brings with it depression, divorce, suicide, unexplained illness and financial crisis. In this article, I try to answer the regular question of why home loans repayment is fixed at twenty years instead of five years.

Why Can't I Repay My Home Loan in Five Years?

Why is the repayment period fixed at twenty years for a home loan, while that of a car is fixed at five years? This is a question many Namibians have asked. In Namibia home loans are for a term of twenty years with an interest rate that's flexible over the life of the loan. You have a choice to pay off your home loan much faster by opting for a shorter period of five years, unless there are conditions attached by your employer subsidy. Take the example of a home loan of N$500 000 at an interest rate of 10 percent in table 1 below. The monthly repayment on a twenty-year loan amounts to N$4 825.11, and on a five-year term your monthly installment increases to N$10 685, an increase of N$5 860. While those with higher income can afford a monthly installment of N$10 685, for many people with income below N$20 000, the only way to afford a house of N$500 000 is to increase the repayment period to 20 years.

A clever investment decision will be to stick to a twenty-year mortgage loan repayment and use the excess of N$5 860 to clear other debts, buy another house or invest on the stock exchange and other investments where you could earn more than 15% annual return.

Home loan payments are divided between principal (the amount you borrowed), and interest (the cost of borrowing the money). Each month a little bit more gets applied to the principal balance. Table 2 below shows you how much you will have paid back to the bank on a mortgage loan of N$500 000 at the same interest rate over a 20-year period. The total mortgage repayment on a twenty-year loan would be N$1 158 025.97, including the interest paid over the life of $658 025.97.

The total repayment on a five-year mortgage for the same amount ($500 000) at the same interest rate would be $637 411.34 and the total interest paid over the life of the loan would be only $137 411.34, so the term of your mortgage loan makes a big difference to the interest cost you pay on your mortgage loan. The answer to your question of why a home loan has a 20-year term, while a car has 5-year term is that a house is a long-term investment and appreciates in value, while a car for personal use is not an investment and its value depreciates to zero over time. In addition many people will not be able to afford a house, if the term is reduced to five years.

Finally, your home loan is much cheaper than the interest rate you pay on your credit card, personal loans and overdraft facilities. Before you decide to pay off your home loan over a shorter period you need to ensure that you have paid off other expensive loans that might carry much higher interest rates than the home loan rate you are paying.

• Martin Mwinga works for First Capital Treasury Solutions and can be contacted at mwinga@firstcapitalnam.com.

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