Getting a Mortgage: What Your Bank Won’t Tell You
Mortgages in Nigeria are a relatively new concept despite the common Nigerian dream of becoming a homeowner. A mortgage affords you the opportunity to own a home in a choice location while avoiding rising construction costs and your pesky landlord. It’s still largely understated and under-utilized in the country due to concerns about debt management, high equity contribution (at least 30%), exorbitant mortgage interest rates (15 – 25%), poor credit facilities and a lack of trust in the system.People still have reservations about the honesty of the commercial banking system and it’s no surprise that transactions on the scale of mortgages (₦ 1 million to over a ₦ 50 million) would naturally draw even more skepticism from Nigerians. Most Nigerians would rather build their homes from scratch as this allows them to build at their own financial pace as opposed to making monthly payments.
Mortgage banks, on the other hand, have worries about the ability of borrowers to finance their loans and a lack of credit history database makes it difficult to assess applicants appropriately. This lack of credit history has led mortgage institutions in the country to restrict their mortgage loans to salary earners since there is a guaranteed source of income that can be used to finance monthly repayments. Other requirements of a mortgage are also designed to help the bank clarify the capacity of the individual to repay the loans. Your loan officer will often give you some good tips about getting a mortgage but there’s only so much can say before they dampen their chances of getting your business and so there’s often a lot that mortgage banks ensure their officers leave unsaid. After all, they’re still in the business of making money and sometimes helping the client means less money for the mortgage institution. Here’re a few things you’re unlikely to hear if you inquire about getting a mortgage in Nigeria.
“This isn’t the right loan for you.”
A mortgage loan officer’s job is to help you find the best deal that works for both parties. That involves risk management especially on the part of the bank as it would be counterproductive to help you finance a home you are incapable of repaying. Besides, you would easily see that the loan was beyond your capacity to finance and would turn down the offer. However, that’s not to say a loan officer won’t go out of his way to pitch you a loan that you can barely manage whilst earning the mortgage bank a handsome profit in interests.It’s crucial to analyse your finances top-to-bottom (leave out no expense or income) before taking on a mortgage.
“Just cause you have the amount required doesn’t mean you can afford”. Any loan that leaves you barely surviving after making your payments surely isn’t right for you. It’s prudent to restructure your expense and make sure you’re not stretched too thin before applying for a loan.
“A slightly higher rate for you means a big paycheck for me.”
Getting you a loan with the lowest possible interest rate is not necessarily in your loan officer’s best interest. Rather, they probably want you to take the highest rate that you can afford. That’s because on top of their regular commission — usually 1% of the loan — lenders can earn an “overage” of another 1% to 2% if they sell you a loan that is more expensive than the best available deal.
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Sometimes they mark up the rate by one point; other times, it’s just half a point. In any case, it adds up. Most consumers know enough to shop around. Lender A tells them 10.25% and Lender B says 10%. But they don’t know that Lender B can go down to 9.75% because they don’t bother to ask.” To keep this from happening, get your loan officer to show you the daily rate card — a printout that lists the lowest available rate on all of his products.
“Our APR doesn’t mean what you think it does.”
When mortgage institutions advertise their loans, they use annual percentage rates or APRs. The APR is supposed to help you compare loans on equal terms by combining the fees and points with a year of interest charges to give you a loan’s true annual cost.
The problem is, every lender’s APR policies differ. Some include their application fees in the APR, some don’t. So two loans from different banks may have different APRs even though they have identical rates and points. To complicate things even more, APRs also vary depending on the size of the loan, whether it is adjustable or fixed, and on the lenders’ requirements for mortgage and title insurance. APR isn’t necessarily what you think it means. Ask a financial advisor to help you navigate how all the factors determine how much you’re going to actually pay. Your needs and plan of payment are also more crucial than an arbitrary APR.
The simplified example below should help you understand:
This chart shows the interest rate, APR and total costs over time for a ₦5,000,000 mortgage in which 1.5 discount points cut the interest rate by one-quarter of a percentage point, and another 1.5 discount points cut the interest rate by a further quarter of a percentage point.
Points and fees
All costs, 3 years
All costs, 10 years
|All costs, 30 years||₦9,188,800||₦9,001,000|| |
After 3 years, the loans with the lower APR are more expensive than that with a high APR, showing that a lower APR doesn’t necessarily mean a cheaper loan depending on the tenure of your loan, the size of the loan and how the APR is formatted.
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“We never met a fee we didn’t like.”
It’s bad enough GTB is charging you obscene amounts for “Card maintenance” but when banks make home loans, the extra fees can go through the roof — often to the point of being illegal.
Lenders are required to give you a good-faith estimate of your closing costs when you hand in your application, and extra charges are a violation of the law. But some banks try to sneak them in anyway. Banks tend to be very creative when it comes to fees.”
Always ask for a detailed, itemized list of your estimated closing costs when you hand in your loan application. It’s required by law. Then on closing day look carefully at the figure called “amount financed” on your settlement papers. If it does not equal the principal you are borrowing, minus any points or interest paid upfront, ask your loan officer why. It could mean he slipped some fees into the amount financed and you can guess what that means: You’ll pay interest on those charges.
“You should worry about our finances too.”
The chances that your bank will go under are slim, but it does happen. Nigerian banks have a long history of going under so this isn’t too far fetched. Get a mortgage from those who have stood the test of time lest the mortgage institution is liquidated and you become stranded. Here’s a recommendation from us which includes mortgage banks that have been around for long enough with good end-of-the-year numbers.
“What happened to your prepayments? Can’t be sure.”
Many homeowners pay down their principal early, bit by bit. It’s a great way to reduce your interest payments over time. But often those extra payments will sit in an escrow account — and won’t be credited toward your principal — because your lender doesn’t know what to do with them. Why aren’t lenders on the ball? It confuses payment schedules, for one thing. But lenders also make money on the interest you pay — income that’s eliminated when you prepay your principal. Ensure your mortgage bank does the right thing when you make a prepayment.
Mortgages in Nigeria are clearly not for everyone at the moment and may prove hard to manage. Renting an apartment which only requires an annual payment until you can comfortably afford a mortgage is a smart move if you don’t yet have the required funding to build your dream home or buy an apartment outright. Renting an apartment even in the extra crowded Lagos is now easier than ever though with a platform like ToLet.com.ng. You also have the option building your own house from scratch which does not require you to make any more contributions than you are capable of. This means you may halt the building process at any point in time if you no longer have the financial wherewithal to continue.
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The bottom line is pretty simple. Completely evaluate your finances, estimate the cost of paying rent on an annual basis whilst building your own place and compare it against a mortgage (you can use a mortgage calculator to estimate your payments) before making any decisions.