Accessing mortgage financing in Ghana
Home leasing is a worrying experience that most people go through when their lease ends. The thought of looking for advance payment for a homeowner, the ever-increasing cost each time one’s lease is up for renewal, the challenge of combing through various properties, make home ownership the wish of every individual. Homeownership brings intangible benefits which include a sense of stability, belonging to a ‘class’ or even a community, and pride of ownership as well as tangible benefits such as owning an asset or equity. Despite these benefits, most people are unable to afford the ‘luxury’ of owning the right to any property. This is the case in both developed and developing economies alike, but the situation is quite baffling in developing countries, of which Ghana is no exception. Several factors, including the increasing cost of building materials, hinder the ability and desire of people to own houses. The desire to own a home does not begin and end with an honest wish, but involves a deliberate and conscious effort towards planning one’s financials and determining the kind of property desired before finally settling on a purchase or choosing to build. The means to own a house has become a critical concern in these pressing times, making it difficult for the average individual to make an outright payment for a house, much less of saving a percentage of one’s meagre salary to purchase or build a house overtime. Considering the extent of time involved in saving to build a house, exploring an alternative source has become the more appropriate option one can consider– the mortgage financing. This notwithstanding, people shy away from this option due to the general perception of the cost of servicing, the availability of easier to access financing alternatives, and the processes involved in securing the mortgage facility among others.
Accessing a mortgage facility
Accessing a mortgage finance in Ghana has been described by many as a complicated process and as such deterred many from hopping on to the ‘ideal’ opportunity available to become homeowners. The Executive Head, Home Loans Business at First National Bank Ghana Ltd., Kojo Addo-Kufuor, however notes that although the process of securing a mortgage facility could sometimes be thought of as a complex process, it should rather be seen as a logical process. “Anywhere you apply for a mortgage, it comes with a detailed application process. It’s even simple here in Ghana; it is just you and the bank. Elsewhere, both the vendor and buyer are required to engage solicitors to close the deal. There’s a lot of investigations to be done: first about you and then the asset. It cannot be a simple process given the amount involved. [So], it’s not a difficult process but rather a logical one. Once everything checks out, we proceed to close and disburse the funds. [However], because people have alternatives– build in stages over time, borrow short term to acquire a long-term asset etc., …this makes it look complicated.” Besides, it can be observed that the mortgage market in Ghana is at a rudimentary stage, with the market facing numerous challenges ranging from lack of finance to write home loans, low patronage of mortgage products, clients defaulting on mortgage facilities to macroeconomic instability. Recent adverse effect of the Covid-19 pandemic, the loan tenor involved, alternative sources of finance and insurmountable political ploys among others have also truncated, in part if not whole, the growth potential of the mortgage market. Addressing these downsides, Kojo Addo-Kufuor noted that with the right education, and engagement with regulators on key mortgage market issues, these situations could be gradually resolved. “Market education is our number one tool to ensure that people can realise that the process isn’t as impossible or complicated as they may think. Over the years, we have engaged the regulators, lands commission and other partners to make sure that the product is more efficiently delivered. “[Thus], we are advocating on one side and educating the public on the other. As a result, people are generally aware that this is the best option to finance their homes.” Speaking further on other challenges, especially on the loan tenor, Mr. Addo-Kufuor mentioned that this also plays a major role in the mortgage finance process. “The tenor of the facility also plays a role– the longer the tenor, the more affordable the mortgage servicing becomes. At present, we can offer home loans with up to 20 years’ repayment period. There have been suggestions to extend this tenor further to increase affordability. While that is certainly the case, it is also true that the longer the tenor, the larger the interest component of the repayment becomes.”
Who qualifies for the mortgage financing?
Contrary to the myth or perception that mortgage finances are meant for a certain group of people, preferably from middle to high end income earners, the mortgage expert averred that the mortgage market coverage is not limited to such categories, but for all and sundry. Speaking from an industry perspective, Mr. Addo-Kufuor, said in order for financiers to benefit from the issuance of mortgage facilities, they must consider the masses. “By its very nature, the mortgage product is a mass product. If the numbers aren’t huge, you don’t get the benefits of economies of scale required to deliver the product. However, [if] the numbers of people willing to take the facilities are relatively small, it then appears expensive and it’s hard for the financier to benefit from economies of scale. “You have to target the mass market; you need volumes to make this product work. If you do it case by case basis, it becomes inefficient to deliver and therefore becomes more expensive.” Mr. Addo-Kufuor buttressing his point gave a logical example saying “if as an individual, you earn about GH¢ 6,000, you certainly qualify for a facility to get you on the property ladder. Again, a husband and wife who together earn GH¢ 6,000 can also apply to acquire that same property.”
COVID-19 impact on Mortgage Financing
With the advent of the Covid-19 pandemic, most individuals within the formal sector of the economy were impacted either with their wages reduced or experienced job losses. As such, persons who wished to have applied for mortgage facilities were adversely affected and those servicing their facilities, Mr. Addo-Kufuor said were mostly rather proactive about servicing their mortgages. “Covid-19 had more of an operational effect. There has been a general slowdown in activity because of the shift system in most work places. Covid-19 has resulted in most companies working at half capacity. It also had adverse effect on affordability because some clients experienced job losses, and pay cuts. “As a bank, we have given eligible clients COVID relief to help ease the difficulties in loan servicing.”
Decoupling Housing industry from Mortgage industry
More often than not, many equate the housing market to the mortgage sector. However, Mr. Addo-Kufuor, drawing the lines between the two clarified that the two sectors were related but in many respects are completely different from each other. He further pointed out that, although factors that drive the housing market might be similar to that of the mortgage market, they are economically separate from each other. “The housing industry and mortgage industry move in the same direction of the economy. However, the housing industry is decoupled from the mortgage industry. People tend to equate the two; they are two separate things. “The housing industry will always be on a trajectory of its own depending on liquidity in the market– that’s how much money is in circulation, and what investment alternatives people have. However, the mortgage industry is more macroeconomic driven. This implies that while there may be a lot of home construction and other forms of real estate activity, most of this tends to be financed by other solutions besides home loans.” The mortgage expert further intimated that “if you’re looking at the housing industry in terms of physical activity, then by simple observation you have to accept that it is extremely buoyant.”
Factors that determine the cost of a house
Prices of houses across the globe, Ghana not exempted, have been skyrocketing recently leading to a public uproar among aspiring homeowners globally. However, developers have attributed these high costs to some factors including: the high cost of building materials, the level of demand in some areas, and in most part, market speculations. Also, one may attribute increase in population to the general demand effect and its associated price hikes. Acknowledging the concern, the home loan executive concurred that “there are several factors that contribute to the increase in house prices.
These include cost of construction material, land prices, general macro-economic conditions, and then supply demand dynamics.” In view of these high prices, there have been calls by residents in Netherland to the European Union to address the rising house prices. Narrowing the situation to Ghana, the Mortgage Executive observed that beyond the housing market speculation, the macroeconomic instability is another factor that contributes to the high cost of houses. He further disclosed that due to fluctuations in inflation rate, interest rate and exchange rate among others, most individuals use investing in real estate as a safer destination for their capital as they simply hedge against macroeconomic uncertainties. “Real estate has become the asset class of choice for most investors, especially those who wish to preserve their investments in dollars. As such, in addition to those who are buying property for accommodation, there are many transactions which are properties being used as a form of savings in dollars.”