I earn Sh420,000 but loans have crippled me. Should I sell my house to clear my loans?

My name is Andrew. I am married, and with just about 10 years left to retire and in a permanent job with a good gross package of Sh420,000 per month. However, I am heavily indebted, with two bank loans totalling Sh7 million, with total loan monthly payments of Sh170,000.

Most of the loans went towards house construction at home and vehicle purchases. Further, Paye tax is about Sh120,000 per month. After other deductions, I am left with Sh110,000 per month. Additionally, I make credit card payments of about Sh50,000 every month, and because it strains my finances, I go back to the credit card, extending the cycle of debt.

Further, I need to pay my tithe of Sh42,000 per month. I am stuck and frustrated, and the loans are about five years away from completion. What should I do? I can’t even enjoy my salary because it all goes to debt payment. The good thing is I have a Sh30 million house in a big town where we live.

Should I sell this house, clear the loans and build another house with the balance? I am tired of these debts.

Alex Kibebe – Founder of Rubiani Wealth Management Ltd and an investment consultant and business development coach:

Given that you have 10 years to your retirement, your priority should be that of getting out of debt and building passive income to cover you in your retirement years. In that case, your best option would be that of selling off your house.

However, since it may take some time to sell your house, review your budget and see how you can temporarily reduce your expenses to get some relief as you await the sale of your house.

Once you have sold your house and paid off your debt, I would advise you to re-invest the balance as opposed to using the funds to construct another house. This way, you can have a flow of passive income and with time, build another house.

If you manage to raise Sh30 million from the sale of your house and pay off the debt, you should have a balance of about Sh23 million. I would advise you to invest this fund in a treasury bond as the current interest rates are quite favourable. The most recent treasury bond of November 2023 had a coupon (interest rate) of 17.9327 percent, a tax rate of 0 percent and a term of 6.5 years. If you invest the Sh24 million in such a bond, you will get a return of Sh4,124,521 per year – tax-free.

With the proceeds of the treasury bond, you can reinvest in other bonds or diversify to other investments such as rental real estate and investing in a dollar fund to build passive income for your retirement. There are credible real estate developers in the market selling small unit houses (bed-sitters and one-bedroom houses) in major towns for between Sh2 million and Sh3.5 million with a return of 7 to 9 per cent per annum and these are worth considering. On the other hand, diversifying to a dollar fund will enable you to hedge against inflation and a possible weakening Kenya shilling.

If you keep reinvesting your treasury bond proceeds in other treasury bonds with an average coupon of 14 per cent for six years, I have calculated that your passive income will be approximately Sh7,300,000 per year or Sh608,000 per month. If, on the other hand, you re-invested half of your treasury bond proceeds in real estate with a return of eight percent per annum and the rest in treasury bonds, your passive income should come to about Sh6,100,000 per year.

As for building your home, I would suggest that you wait for the end of the term of your initial bond purchased to use the funds to buy or build your home. This would be ideal if the term of the bond is between 6 and 12 years like the 6.5-year term bond example provided above.

This way, you can take time and think through the ideal design, size and location that you would like for your retirement home. You can also consider building your house as your initial post-retirement project.

You have an allocation of Sh42,000 per month in tithe payments to your church. This amount is equivalent to Sh504,000 per year. As much as tithe is tied to personal belief, these funds are not cast in stone; they are subjective. You may want to evaluate at a personal level the benefits of slashing them down or redirecting them altogether as a means to improving your financial and investment position.

If you have any money problems, send us an email at [email protected] and leave your number for contact. Money questions will be answered in this column.


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