Hi Wazuans,

I currently own a house on which l am told l can get financing from HF, with the house as collateral. The thing is a couple of cases l know like this from back in the day, ended up with the owners losing the houses to banks - which were sold for a song by connected bank managers. I also have access to an arrangement my employer has with HF for 6% interest on reducing balance. Any wazuans out there with this HF arrangement? What's your experience? I have spoken to HF and even got all documentation - looks too good to be true. Would like to use the funds to develop some property. But concerned due to historical reasons

Thanks GG.The fear of taking loans was background info, due to past experiences. My question revolves around your points number 1 and 3.

@ GG
Barrywhite is very clear on why he needs the loan (develop some property). In your response, you talk of conspicuous consumption and a head not screwed right. I don't think it was warranted. Let us help others without use of such words unless we have all lost values

I doubt the returns on the property will be able to service the loan. Again l cant get the moratorium. But l have a few fall-backs that could become handy should l leave employment and have the interest rate go to 14.5% - by clearing a considerable bit of the loan. These back ups are off-shore stocks, NSE, sacco, a life insurance and investment cover and a couple of undeveloped plots. And may be at worst pension. What l am not sure about is whether to go for the HF deal or liquidate some of this and develop the property loan-free; and start all the above from ground zero. Is there someone out there who can look at all these and advice - even if at a fee the opportunity costs and the most effective economic way forward.

I take no offence to any of the above advice. Thanks so far for all.

@Barrywhite if you doubt the returns will be able to service a loan of 6% why on earth are you developing that property? The cheapest loan you can get is 12% from a sacco so 6% is a super bargain. I think you are risk-averse. What you need to look at is just how much of your present income will go to repay the mortgage if it's more that 35% just forget for now until you improve your cash flow. IMHO it would be unwise to liquidate your holdings to develop a property which can't repay 6% mortgage it will just make you broke.

I thought HF has some guys who spew all this advice when they assess your suitability for a loan.

The land is in an area where developments are controlled; so l can only do one unit - a bungalow or mansionette. Being in the outskirts of Nairobi, rates there wont be much in the immediate term, but would be promising in future as the area develops (hopefully). I wish to develop and own for future rental income; and bequeath my son some day. As at now my salary can accommodate deductions forecasted, fairly comfortably. I'd never thought of building and selling - now 'The Merchant'is giving me a brilliant idea here. A masionette there wouldnt fetch more than 30k a month. Repayments would be about 50k a month.

Barrywhite,
My thoughts hinge on 2 important things
1. You have equity (in the form of the said property)
2. You would like to develop this property and sell (borrowing from your light bulb moment with ‘the merchant)
This deal is simple;
You employer has an arrangement with HF for Staff construction loans
Calculate your debt service ratios, i.e. …should be about 50% of your Net pay (guessing…and I am pushing this to the max assuming you can comfortably pay 50% of your
Get a valuation of the property done by HF’s registered valuers. (this will represents your equity input)
Get drawings and BQs and the necessary building requirements (HF will help you in this regard)…
Dependent on the value of the land, HF will definitely look at any devp that has 60:40 Debt/Equity, however if your equity (land) more than covers the cost of construction, your good to go and use the land as security forgetting this other property you were initially considering to use as collateral.
Build (say 3-6months) get to the roof, consider going prices for finished houses of similar size, and put the house on the market for sale and let the potential buyer finish the house to his/her specs.
This will make you serious colour, but a better deal would be to look for a fresh property where your equity input will be like 5% i.e. your down payment for land and interest costs
Propose to HF you would like to buy the ‘land’ and construct, and you have only the 10% dep for the land purchase but your debt service ratios can support serviceability to completion of construction.
Let me illustrate alternative 2;
Land costs say 5 mio. You must have 500K for the 10% and some additional float for legal fees etc.
Construction will cost say 4.5mio for a say 4 br maisonette; implying total project costs would be 9.5 mio plus say another 500k for additional incidentals. (this you must work out for yourself)
You apply for 9.5mio land and construction loan (assuming your service ratios are in order), you acquire the land within ninety days of SALE agreement and begin paying for the land (on reducing bal. basis) meaning that your only repaying that portion attributed to the land transaction, at this point you should be ready to construct and break ground say in1-2months (you would rather stall abit as your land appreciates after perfection of securities)… jenga to the roof in say 2-3months costing about 2.0 mio (your outstanding loan is now at 6.5mio after 5 months but 8 months after you executed the sale agreement)… say your land has appreciated conservatively at 20% in 8 months, to 5.4mio and you say your profit element from construction is say 100%, (the structure which cost you 2.0mio is now worth 4.0mio)…total value comes to 9.4mio. Sell the house even at 10mio as is. Repay loan 6.4mio, keep 3.6 mio (after having invested say 500k- as land depo +whatever other incidentals).. and move on to the next.
12 months tops for turnaround. Don’t complicate your life.