Need to rethink mortgage lending and borrowing in struggling economy

Many Nigerians are really poor, but have sunk deeper into poverty in the last three years as the economy struggles, making it very difficult, if not impossible, for them to afford even basic necessities of life, including housing.

High incidence of poverty in Nigeria is the reason for mortgage being unaffordable and inaccessible in the country. It is also reason for the high housing deficit in the country that has left over 80 percent of the city dwellers in rented accommodation where they spend much of the income on house rents.

So much demand is made on mortgage loan seekers that they end up not being able to afford the loan. For that reason, mortgage is inaccessible to them, and that makes it necessary for supervising authorities such as Central Bank of Nigeria (CBN) to rethink mortgage borrowing and lending.

Mortgage is an important aspect of the financial system because of its connection with housing. In other countries of the world where the mortgage system works, when people borrow and institutions give out mortgage loans, it is always for building, buying or renovating existing houses.

But in this part of the world, because of the many contradictions associated with it, it seems as if mortgage does not exist at all. Many Nigerians, particularly those who need it, do not believe that there is anything mortgage in the financial system, not necessarily because of its relative newness in this environment, but more because of its unaffordability and inaccessibility.

Though affordability is a relative term, it is very clear that houses in Nigeria are generally unaffordable such that when experts talk about unaffordable housing, almost always, they trace the cause to mortgage which is only available to, and affordable by those who don’t need it—the rich.

Poverty level in Nigeria is high. Its prevalence is such that it is almost synonymous with existence and so many people are so poor that those that are classed as the rich are just a small fraction of the society. Again, just a few people are on employment and within this group are so many people that are under-employed.

For this reason and more, mortgage borrowing and lending is always a big issue for both the lender and the borrower, mostly because interest rate on mortgage loan is not in any way different from the rate on commercial loans given by deposit banks.

Mortgage lenders still anchor their loans on good jobs with fat pay, meaning that a mortgage loan seeker is expected to be somebody in a good job or private business with an assured and regular stream of income.

As against 6 percent interest rate and repayment tenor of between 25-30 years, depending on the borrower’s age, mortgage lenders charge 20-25 percent interest rate with a repayment tenor as short as 12-24 months, creating a mismatch between interest rate and purpose of borrowing.

The ever widening housing demand-supply gap easily finds explanation in commercial interest rate charged on mortgage loans which makes such loans unaffordable to home-seekers. “Though the ability of banks to provide money for mortgage has changed on account of credit challenges in the financial system, mortgage affordability or the fundamentals for lending have not changed”, says Adeniyi Akinlusi, MD/CEO,Trusbond Mortgage Bank.

“The mortgage industry does not operate in isolation of the economy. Certainly, as an integral part of the economy, it has to be affected by crisis in the economic. Nevertheless, the fundamentals for lending have not changed, which means that if somebody has a good job with a financial institution or a multinational company, and the pay package is high enough for him to afford a mortgage, the crisis in the economy has not changed that affordability”, he adds.

The past few years have seen quite a number of mortgage products aimed at enabling subscribers own their own homes, but these products are yet to help reduce existing housing gap by increasing housing stock.

An expert, who does not want to be named, explains that the mortgage products some mortgage banks offer are not the type that will make any impact on housing. “The mortgage products that we have today are commercial mortgages from which the investor wants to recover his money; it is just like someone else who has invested in any other venture. He has to recover his money because he borrows from the same place like you”, the expert notes.

Mortgage products can make impact on housing only when there is government intervention and, in other jurisdictions, there is government intervention to make mortgage affordable to everybody, no matter the income level.

In developed economies, mortgage has been used to move the economy from being import-dependent to a producing and exporting one. Akinlusi says mortgage institutions need long term loans for housing finance, insisting that when there are enough funds to lend to property developers and to home seekers, the entire economy would be stimulated.

It is expected that by the time there are enough funds in the hands of mortgage institutions for long term loans to property developers, there will be a lot of property development activities and when this happens, a lot of other activities will be generated and the economy would be better for it.

“You can imagine when there are many developments going on at various parts of the country. The long term effect would be the development of industries and factories that produce building materials such as cement, rods, roofing materials, wooden materials, etc”, Akinlusi said.

“This will ultimately impact on the wider economy and your guess is as good as mine as to what follows when people have enough capital at their disposal. Definitely, investment is the next line of thought and, depending on the prevailing business environment and government policies, people will invest in anything including taking up mortgage loans”, he assured.

Chuka Uroko