Investopedia defines mortgage as “a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments”. Simply put, a mortgage is a loan granted by a financial institution to a borrower for the purchase of a house, with the purchased house serving as security for the loan.
The practice of acquiring residential homes through mortgage has been around for hundreds of years, with some scholars tracing it as far back as the 12th century. However, it was not until the 1930s that what has come to be known as the 30-year mortgage started – with funding provided not by banks, but by insurance companies. The US Federal Housing Administration (FHA) is credited with catalyzing the growth of modern mortgage by lowering the down-payment requirement at that time (the 1930s) from 80% to 20%. It also offered mortgages of 15 years (compared to 3-5 years then existing) and eventually extended mortgages to 30 years we now have.
In Nigeria, the idea of acquiring a home with a mortgage is still not widely accepted. A number of factors have been adduced for this: high interest rate, delay in processing mortgage application, high home prices, cumbersome foreclosure process, and general aversion to credit, etc. many people prefer to accumulate capital and build – something many unfortunately do not end up achieving. In some communities and ethnicities, the man who acquired his home through mortgage is regarded as not being ‘man’ enough. After all, the house he lives in does not belong to him; and he could have his family and belongings thrown into the streets should he default in his mortgage tomorrow! Ironically, the same person who loathes the idea of a mortgage (of say 10 years) may not have a problem paying rent for 20 years!
While not downplaying the risk of foreclosure in the event of default, it is most times the lender’s last option.
One of the real reasons why mortgage adoption/acceptance is low in Nigeria is the low level of awareness about the benefits of mortgage. Whereas there is a general believe that mortgage interest is astronomical, unreasonable and unaffordable, empirical data has shown (as will be demonstrated shortly) that the value derived from taking up a mortgage far outweigh these misconceptions.
Let’s take an example:
Assume a 2-bedroom apartment is rented annually for N800,000.00. Let’s assume further the following:
Most people who are averse to mortgage on the grounds that it is expensive never consider the equity that is built over the mortgage period. From the illustration above, an estimated equity of N21.5 million will be built over a 10-year period. In reality, this could be significantly higher, as the annual property growth rate of 6% used in the illustration is very conservative. Under the Personal Income Tax Act, mortgage interest on owner-occupied property is wholly tax -deductible. In the illustration above, there will be a tax savings of N2.2 million over the duration of the mortgage.
The benefits of taking a mortgage become even more significant if the mortgage is refinanced. Thankfully, Nigeria Mortgage Refinance Company (NMRC) stands ready to refinance all qualifying mortgages. If the example above were refinanced and the mortgage interest reduced by just 100 basis points (to 17%), tax savings will be N2.0 million, while home ownership benefits will increase to N16.1 million! In addition, NMRC refinances mortgages up to 15 years, thereby lessening the cashflow impact on mortgagors.
When then is the best time to take a mortgage? The answer is simple and clear: the best time was 10 years ago! But it’s not too late to start today – first by opening a mortgage savings account or talking to your bankers. Visit www.nmrc.com.ng for a list of mortgage lenders whose mortgage loans can be refinanced by NMRC.