How to compare a developer payment plan against a mortgage

Two buyers look at the same apartment. One takes the developer's payment plan, the other takes a bank mortgage. They pay materially different amounts for the same home, and neither of them worked out which was which before deciding.

The comparison is not difficult. It is just that the two options are quoted in ways that cannot be directly compared, so most people give up and go with whichever sounds simpler.

Why the headline figures mislead

A developer payment plan typically advertises no interest. That is usually true in the literal sense — but the cash price and the payment-plan price are often not the same. The financing cost is built into a higher headline price rather than charged separately.

A mortgage advertises an interest rate. That is also true, but it excludes arrangement fees, valuation, legal costs and mandatory insurance, all of which you pay.

Neither number is a lie. Neither number is the answer.

Work out the total cash out, over the same period

Do this for each option:

1. Add every payment you will make. For the payment plan: the deposit plus every milestone payment. For the mortgage: the deposit plus every monthly repayment across the full term.
2. Add every fee. Arrangement, valuation, legal, insurance, registration.
3. Compare over the same horizon. If the payment plan runs three years and the mortgage twenty, you are not comparing like with like — work out what you would still owe on the mortgage at year three, and add it.

Put both totals next to each other. That is the comparison.

The question the arithmetic does not answer

Total cost is one factor. Cashflow is another, and for many buyers it matters more.

A payment plan concentrates your obligations into the construction period — typically two to four years of substantial payments. A mortgage spreads a smaller monthly amount across a much longer term. The plan may cost less in total while being far harder to service month to month.

Be honest about which constraint actually binds you. A cheaper total you cannot meet is not cheaper.

What else changes the answer

• What the money would otherwise earn. Cash paid to a developer early is cash not earning anything elsewhere.
• Rate risk. Most Kenyan mortgages are variable. Model what happens to your repayment if rates rise several points, because they have before.
• Completion risk. On a payment plan you are exposed to the developer. On a mortgage for a completed unit, you are not.
• Flexibility. Check whether the mortgage allows early repayment without penalty, and whether the payment plan allows you to settle ahead of schedule at a discount.

Our position

We are not financial advisers and we do not earn anything from how you finance a purchase. What we will do is sit down and lay both options out properly, with real numbers for the specific unit you are considering.

Sometimes the plan wins. Sometimes the mortgage does. What should never happen is choosing without knowing which.