Is a Land Mortgage the same as a Home Mortgage? | mortgages in kenya

A Guide on Mortgages in Kenya | Land & Home Mortgage

Get a Land Mortgage for Plots for Sale in Kamulu & Malaa Kangundo Road

Owning properties is a prestigious thing in Kenya and across the globe. However, if you haven’t saved enough money for it, you may be required to involve a lender to either buy you land, or give you a home mortgage, depending on the investment you want to make. But is a home mortgage the same as a land mortgage? This piece will review the difference between two mortgages in Kenya.

A land mortgage and a home mortgage are not the same, although they are related concepts. A home mortgage, also known as a residential mortgage, is a loan taken out to purchase a home or other residential property. When you take out a home mortgage, you typically borrow money to buy the property and use the property as collateral for the loan. If you fail to make the mortgage payments, the lender can foreclose on the property and take ownership.

A land mortgage, on the other hand, is a loan specifically used to purchase vacant land or undeveloped real estate. In this case, the land itself serves as collateral for the loan. Land developers often use mortgages to buy land for various purposes, such as building a home, a commercial property, or simply as an investment.

The key difference between the two is that a home mortgage is used to finance the purchase of a property that includes a structure (e.g., a house or a condominium). In contrast, a land mortgage is used to finance the purchase of the land itself without any structures on it.

Other Differences Between a Home And a Land Mortgage

In Kenya, there are several key differences between home and land mortgages besides those mentioned above. These distinctions revolve around the nature of the financed asset and the terms and conditions associated with each type of mortgage. Here are additional differences between the two:

1.    A larger Down Payment is Required for Land Mortgages

If you want a land loan, you must make a non-negotiable down payment of 20%. This is not the case for a home mortgage whose requirements for a down payment depend on the type of home loan.

  1. Loan-to-Value (LTV) Ratio:

Lenders may offer higher LTV ratios for home mortgages because the underlying property has a structure that contributes to its overall value. This means borrowers may be able to borrow a larger percentage of the property’s appraised value.

Nevertheless, the case is different for land mortgages since LTV ratios for land mortgages tend to be lower, as vacant land typically has less inherent value and carries higher risks for lenders. Borrowers are hence required to provide a larger down payment for land loans.

3. Interest Rates and Terms of Mortgages in Kenya

Interest rates for home mortgages in Kenya may be slightly lower, and the loan terms are often longer, typically ranging from 15 to 30 years. On the contrary, the interest rates for land mortgages are higher, and the loan terms are usually shorter, typically ranging from 5 to 15 years. This reflects the higher perceived risk associated with land-only loans.

4. Approval Process and Documentation

Approval for a home mortgage often involves thoroughly assessing the property’s condition, legal status, and appraised value. Documentation may include the title deed, building plans, and other property-related documents.

On the other hand, land mortgages may require additional due diligence regarding the land’s intended use and potential zoning or environmental restrictions. The documentation required may include the title deed, land survey reports, and any necessary permits for the intended land use.

Do Land Loans Have Higher Risk Than Home Loans?

Yes. The risk for land loans is high for the financial institution since the land has nothing. This is why you will pay more for land loans and for long. Most lenders reason that one may easily fail to pay a land mortgage because the land is vacant, but it’s hard to let go of a home mortgage because it’s a property they own, and they might be living in it or renting it out. This is why most lenders are hesitant with land mortgages.

It’s important to note that mortgage terms and conditions can vary between lenders, and the specific terms for home and land mortgages in Kenya may evolve. Therefore, consulting with financial institutions and seeking legal advice is advisable to understand these mortgages’ terms and requirements fully.

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