Mortgage Financing in Nigeria

By Abiodun Doherty

Nigeria is the most populous nation in Africa and has the largest economy in West Africa. According to the World Bank, Nigeria’s housing deficit stands at over 12 million. That means the country needs approximately 720, 000 housing units yearly based on an assumption of a dwelling unit a year per 1,000 of population. The mortgage financing gap is estimated at N30tn ($250bn).

Despite the huge housing deficit and a population of over 160 million people, the mortgage or home loan sector in Nigeria is still far from meeting the needs of its people. When it comes to mortgage financing, the market is large, and the need is huge but you need to understand the practical tips and traps you should avoid when mortgage hunting. I will use the word mortgage and home loan interchangeably in this write-up.

Mortgages are structured financing provided by approved financial institutions that accept real estate (properties) as security for the loan. The financing is usually with a long-term repayment plan at affordable monthly installments which distinguishes it from short-term commercial loans. Ideally, the interest rate should be lower than those of the commercial loans. Basically, it is used to acquire or purchase or develop a property.

However, it is also used to access the equity on an existing property. What this means is that when you need a certain amount of money either to purchase a property or for other personal uses, and you present a property you have partially or fully paid for, to the bank or financial institution, they will determine the cash value of the property and give you access to part of the cash value that your property has already gained using the same property as security. This “financial” arrangement is called “equity release”. And it is usually to purchase or develop another property.

Mortgages are available from three primary sources in Nigeria. Firstly, we have primary mortgage institutions (PMIs) whose activities are meant to provide Nigerians with access to home loans. Some of such institutions have “mortgage(s)” or “savings and loans” in their names. The government has insisted that they increase their capital base to enable them to respond to the housing needs of the people. Secondly, the Federal Mortgage Bank of Nigeria and the National Housing Fund are federal programs meant to give Nigerians access to cheap long-term funds for the purpose of buying or developing a property.

The NHF is a federal program that provides contributors who meet its requirement with up to N25m for buying or developing a property. These funds are best accessed through the PMIs. Thirdly, we have banks and other financial institutions’ home loan or mortgage products that could be accessed for property purchase.

Although there have been several improvements in the housing sector in recent years, most Nigerians have not been able to access home loans. And many who have accessed one form of a mortgage or the other are not fully pleased with what they got. The fact is, there is still a lot that needs to be done in this area. At a meeting on mortgage financing in May 2012 the Minister of Lands, Housing and Urban Development, Ms. Amal Pepple, put the country’s debt-to-mortgage ratio, which measures the penetration of the mortgage sector, at just four percent. This was disclosed to be the lowest on the African continent.

Compare these figures: South Africa, 30 percent; Namibia, 20 percent; Morocco, 15 percent; and Tunisia, 13 percent. Other countries, such as Kenya, Rwanda, Botswana, Senegal, Algeria, and Uganda all fared better than Nigeria. This article is intended to create a better understanding of mortgages and hopefully encourage more Nigerians to benefit from it. It is also hoped that it will challenge regulators and operators to address the concerns of the average Nigerian who seeks to access home loans.

What are the likely reasons why access to mortgage or home loans is so low in Nigeria? The reasons are not far-fetched. Firstly, there is a lot of ignorance on the subject of mortgages in Nigeria. Many people believe that it does not exist and those who know that it exists do not know how to access the funds. Secondly, many people are afraid of debt.

The mention of mortgages brings fear into the heart of those who believe that any loan is bad. For an investor, there is good debt and bad debt. Good debts make you rich while bad debts can destroy you. A bad debt is basically a debt that you spend on consumption or on things that will take money out of your pocket. A good debt, on the other hand, is one that you spend on acquiring assets that ultimately puts money in your pocket and makes you richer. All things being equal, a mortgage is a means of buying an asset by paying in “installments”. It should put more money in your pocket at the end of the day……… and it may even make you a millionaire! Thirdly, is the fact that many lack the knowledge and skills needed to access home loans in Nigeria. This series should give you the foundational knowledge you need.

Punch