Thursday, March 24, 2016

Financing and mortgages – Borrowing, #Uganda

[This article is a bit long but I am trying to cover Finance 101 in only 5 minutes.  It is intended for Ugandans but North Americans should read the bit on disability, income loss and life insurance or better still, read The Wealthy Barber.]
In December 2015, my editor called me and asked me why blacks in North America lose their houses and end up homeless.
You see, the way some media at home plays on the negativity of North America gives the impression that all we experience is racism.  WRONG.
Yes, there is racism.  This I cannot deny.  Just because one has never experienced it does not mean that it does not exist.  It is just no longer very obvious except in the Southern states in USA.  Elsewhere, it is kind of hidden but in my case, we have been lucky.
The reasons why people lose their houses and end up homeless are listed below as I explained to the editor.  It has nothing to do with race.
  1. We do not buy houses or build houses with cash.  We borrow to do so.  The borrowing is based on the sources of income you can prove.  Just think about this.  Our mortgage is 2.89% annually.  The average house cost in the Moncton area is $250,000.  This money put in the bank can earn 5% annually or even better, used in a business venture (which has risks) can also earn you multiples of that.  So most people, even if they have cash do not buy houses or build houses using cash.  In 2004 when the company transferred our family from Toronto to the Moncton area, I got the bill for our current house and went to the bank to pay it.  The woman looked at me in a very funny way.  I thought it was my hair or something.  Then she proceeds to tell me “people do not buy houses with cash.  Why do you not take a mortgage?”.  I paid cash but this is also another one.  We had sold the house in Toronto and walked away with some cash.  Mind you, I put a mortgage on the house later.
  2. Mortgages are front loaded.  Meaning that interest on the mortgage gets paid first.  So the first 5-10 years see more payments going towards interest than towards the principal.  This gets interesting.  Mortgages used to have terms of 15-25 years but now have up to 40yrs.  Lock you in and steady payments to the bank, they make money.  Banks here are very aggressive when it comes to retaining customers and getting new ones.  Imagine in most universities during frosh week (intro week), they hand out applications to kids to give them credit cards and most kids do get those credit cards.  Usually the limit is $500 but oh yeah, as long as a kid is 18 or 19 in Canada and in school, they have a credit card.  Talk about getting them into the borrowing mindset for the future.  Most parents do teach their kids to use credit responsibly.  Pay off everything monthly and do not get used to carrying balances.  Many banks believe that once a kid gets into University, s/he will be responsible and will be a future customer who will borrow more from them.  In this case, they are not off the track because some of these kids graduate and get jobs which pay way much higher than their parents, straight out of class.
  3. What happens in most cases when people lose their houses is the reality that after missing 3 month payments, the bank will take back the house and you will be homeless.  Most banks do not want to lose their steady supply of monthly payments and they work with the client to help both them and you.
  4. Failing the working out from the above point, you lose the house whether you are white, black, etc…  Banks are in business to make money and they do not care what colour of skin you have.
  5. To avoid the above, it is advisable to take income loss insurance (in case you lose your job), disability insurance (in case you get sick and cannot work for some time) and life insurance (in case the main bread earner dies).
  6. Disability insurance kicks in when the doctors say the person is unable to work for this time or a set amount of time.  This insurance will pay your bills and then no sweat.  I have even been approached by companies in Uganda which provide this (abafeero even, as if shillings will pay my bank here for my mortgage).  But there are some credible insurance companies in Uganda which provide this.
  7. Income loss insurance kicks in when all of a sudden you lose your job and cannot immediately find one.  This insurance will pay your bills until you can return into the work force.
  8. Life insurance is crucial for everyone and more so for the main income earner.  It pays all the bills should you die (God forbid but death is inevitable) and by having this in place, your family will not be kicked out of their home after your death.
  9. We also buy cars using financing and this is not like Uganda.  Just think about this.  Two weeks ago I bought a new car for our daughter.  I think the cost was $23,000.  I could have paid cash but I am always broke thanks to Uganda.  The interest rate is 0%.  Were I to even have the cash, there is no way in hell I would have given it to the car company.  The annual interest on that in a GIC is some 3% but locked in for 5yrs would be something like 5% annually.
  10. All purchases which need financing need proof of income.  This is where we get tied into monthly payments and if we lose our jobs, die or get sick, we lose.  The family loses.  I hope you will consider buying the insurances I have mentioned above so that you can protect your purchases and your family.
  11. We also have mortage insurers.  These are companies which charge a premium to the lender and it is passed onto you.  Should you fail to pay your mortgage and the bank / lender takes back your house, they can dump it on the market for a quick sale (usually much lower than the prevailing real estate price) and then the mortgage insurer will pay the difference.  Mind you, it ruins your credit and prevents you from borrowing for a while but we also have bankruptcy laws and I will talk about bankruptcy in the future.  People look at Donald Trump and forget that he has filed for bankruptcy some 6 times+, been rejected by many lenders in the past and now he is King Tramp!
Information you could use.
Martha Leah Nangalama
Moncton, Canada
Whatsapp +15068716371.
I have an IT and business background and have done real estate investment in the past.  Walayi!!!

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