In recent years, Nigeria has been experiencing rapid urbanization as more than 50 percent of the population now live in urban areas. Notwithstanding the progress, the United Nations statistics released in 2021 estimated the housing deficit at 22 million homes. This alarming figure is occasioned by the surging prices of land and construction, and excessive financing of houses.
These factors have thus made mortgage a viable option for those who desire to join the train of homeownership in Nigeria but do not have the capital.
A mortgage is a loan in which you (the borrower) use a property or real estate as collateral. You receive cash upfront from a lender to buy a home with an agreement to pay back over a set span of time with interest.
Actually, the home only fully becomes your own after your mortgage is fully paid off. The two factors that determine the interest rates are current market rates and the considerable level of risk the lender is taking to lend you the money.
In the same vein, the market value of the home you are using as collateral and what you can offer will be appraised because these will be used to determine how much you can borrow.
The mortgage system in each country, and in some cases, states differ. This is why it is important for anyone considering this option for long-term home financing in Nigeria to understand how Nigeria’s mortgage system works.
Nigeria’s Mortgage System
Nigeria’s mortgage system has remained unattractive for many years with scary interest rates which appear as a daylight robbery. Analysis reveals that Nigeria’s mortgage lending rate is about the highest in the world. Interest rates for mortgage products from commercial institutions are between 15-30 percent per annum for a tenor up to 20 years. Consequently, after settling the loan, the borrower would have made total payments amounting to three times the principal. Although interested borrowers can get mortgage from the Nigerian Housing Fund (NHF) through the Primary Mortgage Institutions (PMIs) for a lower interest rate of 6 percent, the mortgage is not easily accessible as it is presented to prospective homeowners, and is irrelevant to most Nigerians planning to buy their own homes.
Why Mortgage is Expensive in Nigeria
The major factors responsible for the high-interest rates of mortgage in Nigeria are titling issues, the rather dispiriting bureaucracies in land documentation, and the country’s ineffective foreclosure law.
- High-Interest Rates
The naira has continued to lose its value recently. The resultant effect of this is that inflation rises, causing prices of goods and services to skyrocket. In 2015, the dollar to naira exchange rate was N189 to 1 dollar but in January 2022, 1 dollar is around N415.
So, to compensate for the loss of purchasing power, what mortgage lenders often do is increase interest rates above inflation.
- Bureaucratic Land Allocation and Documentation
The Land Use Act 1978 vests the ownership of all land on the governor of each state in Nigeria. This means that governors are automatically in charge of allocating land for development in their respective domains through their Land Registries. All property transactions therefore require the consent of the governor and compulsory registration with the land registry. This makes administration and documentation of land very poor in most states, since only a few of them have embraced technology. The process is herculean, bureaucratic, and rather expensive, sometimes gulping about 20 to 30 percent of the total fees.
- Ineffective Foreclosure Law
A foreclosure law gives the lender power to repossess and sell the property you used as collateral if you default as the borrower. In Nigeria, however, the foreclosure procedures are not effective as it is bedeviled by a cumbersome and slow judicial process. Cases of mortgage defaulters and repossession of properties remain unsettled for many years in court.
This impasse at times leaves lenders with no other option other but to device different means with some degrees of brutality like using a power of sale which provides limited rights to the borrower.
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Sources of Mortgage in Nigeria
- Federal Mortgage Bank of Nigeria (FMBN)
The Federal Mortgage Bank of Nigeria (FMBN) is a public sector institution that facilitates the development of mortgage finance by overseeing a subsidized mortgage scheme. The bank provides estate development loan for developers, home renovation loan, construction loan, rent-to-own, as well as collects and administers the National Housing Fund (NHF) for individuals.
The NHF was established by the Nigerian government under decree No 3 of 1992. The Fund allows all employed Nigerians above 21 years old, and self-employed workers, earning more than the minimum wage to contribute 2.5 percent of their salaries with an interest rate of 2 percent. The law also charges the government and financial institutions to contribute to the Fund.
The maximum amount obtainable under the NHF has been upped from N5 million to N15 million. It can be accessed by borrowers after 6 months of contributing to the scheme. The borrowed capital is repayable over a maximum of 30 years at the rate of 6% interest. The loan is only meant for house purchase or expansion, or building on a plot that is owned.
Eligible contributors under NHF are required to apply through the Primary Mortgage Institutions (PMIs). The PMI forwards all the documentation to the FMBN after ascertaining that it is in order. The FMBN also checks the documentation and processes it between four and nine months. If the application is accepted, the necessary funds are paid by the FMBN to the PMI at a rate of 4 percent, giving the PMI a spread of 2 percent.
- The Nigeria Mortgage Refinance Company (NMRC)
The Nigeria Mortgage Refinance Company (NMRC) is a Public-Private Partnership arrangement between the Federal Government of Nigeria and the private sector. The NMRC deals majorly in mortgage refinancing. The company does not deal with individual borrowers. It serves as a wholesale second-tier financial institution which provides its member banks – mortgage and commercial banks (mortgage lending institutions) with long-term finance at an affordable interest rate. The funds are raised from the capital market.
By empowering the mortgage lending institutions, the NMRC enables the banks to give long-term loans to potential homeowners at longer tenors and affordable rates. This means that working Nigerian citizens with sustainable and verifiable income are given opportunity to buy a home between N1.5 million and N50 million and conveniently pay for it.
- Commercial Banks
Commercial banks also provide mortgage. However, they provide mostly short-term mortgage since they are operating with short-term deposits. This means that the banks rarely finance housing projects except where the houses are to be placed in the market for outright purchase.
Apart from this, mortgages provided by commercial banks come with high interest rates.
Role of Primary Mortgage Institutions (PMIs) in Administration of Mortgage in Nigeria
A Primary Mortgage Institution (PMI) is usually a bank which could be privately owned or a corporation. The institutions provide mechanism for fund sourcing and disbursement to the various beneficiaries in the real estate projects.
They mobilize funds from three sources: the government through the FMBN; the public via savings, and institutional investors such as commercial banks, asset managers, private equity and other forms of investment banks. Such funds are then made available to potential homeowners who want to purchase a house after presentation of acceptable security, with an agreement to pay back the loan on monthly installments.
The PMIs are also in charge of disbursing loans provided by FMBN for housing projects in Nigeria to the beneficiaries.
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Types of Mortgage
- Fixed Rate Mortgage
This type of mortgage offers a fixed interest rate over a set term, usually between 15, 20, and 30 years. Here, the shorter the term over which the borrower pays, the higher the monthly payment; the longer the borrower takes to pay, the smaller the monthly repayment amount. This means that the longer it takes to repay the loan, the more the borrower ultimately pays interest charges.
The merit of a fixed-rate mortgage is that it guarantees the same monthly mortgage payments throughout the life of the mortgage even if market rates increase. This makes it easier for borrowers to set household budgets and avoid any unanticipated additional charges from one month to the next.
- Adjustable Rate Mortgage (ARM)
Adjustable-rate Mortgage offers an initial fixed interest rate that changes periodically based on prevailing interest rates. The mortgage is more affordable in the short term because the initial interest rate is usually below the market rate. It may, however, be less affordable long-term if the rate rises considerably.
The limits, or caps, on how much the interest rate can rise each time it adjusts and in total over the life of the loan is always known in ARM.
- Interest-only Mortgage
Interest-only Mortgage involves complex repayment schedules. It is mostly used by sophisticated borrowers.
There are records of borrowers who got into financial trouble with this mortgage.
- Reverse Mortgages
Reverse Mortgages are designed for people who are 62 years old or older and are interested in converting part of the equity in their homes into cash.
Reverse Mortgages give such people the opportunity to borrow against the value of their home and receive the money as a lump sum, fixed monthly payment, or line of credit. The entire loan balance becomes due when the borrower dies, moves away permanently, or sells the home.
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Even though a mortgage is one of the surest ways to become a homeowner, many Nigerians are still skeptical about taking it as a result of the problems associated with it – the high-interest rate, the cumbersome and tiring process or land documentation, and the exorbitant fees payable.
Interested persons should seek professional advice as well as take time to study how a mortgage works in Nigeria and the different types of mortgages with their respective advantages and downsides before settling for any.