Key facts about mortgage lending in Nigeria.
If you’ve thought about buying a house, you may have thought about utilising a mortgage as a financing choice. Housing in Nigeria is frequently capital-intensive because of the high cost of construction, rising land prices, and high financing expenses. Some people have been motivated by this to consider having a mortgage. However, because of its high-interest rate and general lack of knowledge, the mortgage option is not very well-liked. Here are some important details concerning mortgage financing in Nigeria that we’ve gathered today.
1. Mortgage Originators – These are the market participants in Nigeria’s real estate industry. The National Housing Fund, banks, and the usual developers, Primary Mortgage Institutions (PMI), are also represented. Given the prevalence of new housing developments in Lagos, purchasing a home directly from an originator is more likely than any other option. This tells us that selecting the right developer is essential if we want a house that is constructed with high-quality materials and delivered on schedule. Additionally, it implies that you should search for a PMI that is willing to provide the greatest deal in terms of interest rates, tenure, collateral, etc.
2. Agents – Lawyer and Real Estate Agents also play an important role in mitigating any risk that may arise out of the choices you make in 1 above. Agents know the market and are savvy enough to recognize the best deal for you.
3. Interest Rates – The absurdly high mortgage rates in Nigeria are a major deterrent to home loan borrowing. In Nigeria, annual interest rates on mortgage loans range from 15% to 25%, excluding fees and other costs. To help put this into perspective, the Western Subprime Mortgage Crisis that occurred five years ago was caused by an abrupt increase in mortgage interest rates from roughly 4% to 8% per year, which resulted in significant defaults. Therefore, if you took out a mortgage loan in Nigeria for $25 million at a 15% pa interest rate, you would have had to pay $37.9 million in interest alone over the course of 15 years. Even more than the Principal herself, that is! The catch with this situation is that at a 15% interest rate, it takes a lender almost 7 years to recoup the ₦25,000,000 it gave you. That is around six years at a 20% interest rate.
4. Tenor – Another important factor in loan repayment is the tenor, or the duration of time granted to pay back the loan. As your principal and interest repayments are evenly distributed over a longer period of time, a longer tenor often results in cheaper and more advantageous cash disbursements. This, however, is highly misleading and hides the true expense to you. Using the aforementioned example, the interest rate would have been ₦88.8 million had the loan lasted for 30 years as opposed to 15 years. In other words, for a house that cost ₦25,000,000, you essentially pay an additional ₦88,000,000 in interest over time.
5. Equity – This is the amount you are expected to contribute from your savings in addition to the mortgage when you plan to buy a house. This amount averages between 10%-20% in Western societies but in Nigeria, Mortgage Originators will often require you contribute at least 30%. Basically, the more equity you contribute on the outset the lower the amount you have to borrow from the bank. To get the best debt-equity mix, its advisable to borrow at an interest rate of 15% or above injecting while an equity of at least 70% for a tenor of 10years.
6. Location– The location of your property is also a very important consideration should you wish to part finance it with a mortgage. Why would anyone borrow money to buy a property in a location that have little potential for economic development? When getting a mortgage the timeline for the economic potential of your location to materialize should always be lower than the tenor of your mortgage. For example, if you buy a house in Epe with a mortgage loan payable over 10years, and property values in Epe double over that same period, then the increase in value of the property would have helped reduce the interest rate you have paid over the years.
7. Cap Rates – Cap Rates are basically the return on investment a property can generate. In other words if you own a property worth ₦30million that can generate a going rent of ₦3million per annum, then the cap rate for that property is 10%. Cap rates matter in a mortgage and particularly in an economy like Nigeria where interest rates are double digits. You definitely want to make sure the rent-able value of your property outweighs the interest payable on it at any given year. Your cap rates should be more than your interest rates otherwise you basically under water.
8. Percentage of your Income – Its advisable that payment for house rent should be no more than one-third of your take-home pay. In the same vein Mortgage payments should also be no more than one quarter of your take home pay or income. The reason is that when you take a mortgage that grabs 25% of your take home, it is very likely that you must have staked in a lot of equity into the property which in itself is a very good thing. It also helps you free up some cash which you can use for your savings and investments.
9. State – The Government always have a stake in almost everything we do. It is important to verify Title ownership of Lands from the Lands registry. It is also important to know what applicable fees are for seeking governors consent, registering land titles, land surveys, land use charge etc. You must also consult them to know of the Mortgage Originators have obtained all the requisite approvals and development permits before buying. According to the Land Use Act, the state governments have the legal power and authority over the lands within their states so they are also very important
10. Taxes – Profit from a sale of property in Nigeria is chargeable for Capital Gains Tax (CGT). There is currently no CGT payable for a sale of a property which is a dwelling house (house that you live in). However, if it is a house that you own and you do not live in it, then you will pay CGT when it is sold. For those looking to obtain a mortgage, your contribution to the National Housing Fund is tax deductible from salary when computing PAYE.