by
Castles Lifestyle
Accessing a mortgage facility in a high interest rate environment is very tricky. You’ve got to calculate your risk and ask yourself a lot of questions: Can I afford it? Can I afford it long-term? Do I have the discipline to sustain the repayments? Why should I do it now? Etc.
In the U.S, up until the early 1980s, mortgage interest rates were as high as 18%, until the introduction of the US Secondary Mortgage Market, which paved the way for interest rate to begin to tumble. Today, the US mortgage rates are driven by the secondary mortgage market. Efforts are currently in high gear to open the door to a Nigerian secondary mortgage market which should also allow mortgage lending rates to start to dip in Nigeria. However, before then what do we do?
Truth is when it comes to your accommodation choices, broadly speaking you have 4 options:
(1) Buy your dream home cash down:
Very few can afford to do this especially when you consider your ideal structure and location.
(2) Buy your land and build over time:
a. Saving up to purchase the ideal plot of land (size and location) may be unachievable
b. Could take an extended period of time to build due to cashflow constraints
(3) Take a mortgage, buy now and pay over time – unfortunately today in Nigeria, interest rates are prohibitive. We see different variations of this option:
a. Mortgage from a financial institution
b. Some kind of similar facility/benefit from your place of employment
c. Similar structure from a developer or vendor
d. Any arrangement that allows you legally take possession today while you spread payment over time.
(4) Continue to rent until you are able to afford A, B or C above:
Not a bad option. Popular in the United States in the early 1980s when mortgage rates were as high as 18%. While the aspiration to own your dream home is there, renting somewhere decent and affordable until such a time owning your own home is achievable is what most people do all over the world.
When it comes to taking a high interest rate mortgage, you need to thoroughly understand the repayment schedule including the naira and kobo (Nigeria currency) implication of the obligation, that is, how much will you repay every month (known as Equal Monthly Installment – EMI) given the loan amount, interest rate and tenor.
See a mortgage calculator below:mortgage calculator
Note: This does not include fees. These are strictly monthly repayment figures (Equal Monthly Installments – EMI) based on the loan amount, interest rate and tenor.
Clearly at 20% interest rate monthly repayments are very high, especially the higher the loan amount. The question is what are the reasons why you want to access a mortgage at a high interest rate?
Now, let’s look at the different types of mortgage products in the market and reasons why people are still accessing high interest rate mortgages:
1. Outright Purchase Loans: (Primary Residence)
Your current rental expenditure is high, perhaps because of the property structure you are renting and/or the neighborhood. If you purchase a modest property in a slightly less affluent location, the difference between your annual mortgage repayment and your yearly rent paid to your landlord may be insignificant. You therefore decide that rather than continue to ‘dash’ your landlord rent, you’ll pay a heavy down payment and buy a house.
It is, however, important to weigh your decision carefully. Can you sustain the repayments over time? Have you considered recurring fees, etc? Your income/pay structure allows you prepay or pre-liquidate in chunks perhaps you earn huge bonuses, which enable you pay large amounts of principal over time, hence you’re able to intermittently reduce the loan balance exposed to the high interest rates.
Though, it makes sense, but do your homework carefully. Are these guaranteed bonuses? Also, other issues could come up that you may be forced/tempted to deploy your bonus towards other things thereby disrupting your mortgage reduction plans.
2. Outright Purchase Loans: (Investment Property – buy to let/resell)
You have substantial funds for down payment (which reduces your monthly repayment). Hence, your rental income will cover your mortgage repayment. Do your detailed analysis. Down payment must be very substantial for this to work. However, it is workable. You believe you are purchasing the property for significantly less than market value, hence you expect the property to appreciate significantly in the short-term or mid-term. You believe you will sell for a significant profit in the future. Avoid plans based on speculation
3. Refinancing Loans
You are accessing the mortgage to refinance your even higher rate mortgage from another bank. It is pertinent to factor in fees, insurance costs, legal costs, etc. It is not enough to assume that it makes sense to switch only from an interest rate standpoint, for instance, because you are moving from 22% interest rate to 20%, it is therefore better to switch/refinance.
4. Equity Release Loans
You are unlocking cash from your property, and the purpose of the loan has an even higher rate of return than the high interest rate loan you are accessing. This has to be truly tested and verified. Examples that have worked is unlocking cash to complete another real estate development, other high turnover businesses such as event centers, pharmacies, highly patronized hotels, guest houses, restaurants, etc.
5. Completion Loans
You are taking a mortgage to complete a real estate project, for instance, you are building twin duplex (2 semi-detached duplexes), you will complete the project and sell one side off to liquidate the loan or substantially reduce the outstanding balance, or you are building flats, upon completion rental income will cover mortgage repayments. The loan itself has to be well structured e.g. seek a moratorium (few months holiday before you actually start repaying on the principal or interest or both). Avoid cost and time overruns on the project.
6. Property under construction
You are purchasing the property significantly below market rate or you expect to significantly gain capital appreciation because you are buying off plan. Seek for a moratorium on the mortgage you are looking to access since the property is not yet ready for occupation. Be clear on how you intend to service this facility in the long term.
