Under normal circumstances financing the purchase of a house should involve a combination of both equity and debt. However, in Nigeria acquiring a house typically involves the use of equity and no debt. Sometimes it takes people 10-15years to complete the construction of a house after years of using private savings from income to fund it. It may also take a shorter time frame depending on the source of income and the cost attached to some income. But that isn’t how things should be done as people shouldn’t be made to fund the full purchase of funds with their private capital. Even the government acknowledges this and it is why we have the National Housing Fund (NHF).
The NHF can help fund up to 90% of the purchase of a house for a maximum sum of N15m and an interest rate of between 7%-10%. This on the face of it looks very mouth watering and attractive. Banks and most mortgage institutions also have their own home ownership schemes, though higher than NHF in terms of interest but also worth the deal. Question most people seeking to own a home should inquire is what are the borrowing rates? How many years do I have to pay back the loans? What percentage of my income can I use for loan repayments.
What are the borrowing rates? According to the NHF, contributors to the scheme can borrow from them at an interest rate of about 7%. By the time you add fees and other hidden charges this may take the cost up to 10% per annum. Mortgage Institutions on the other hand will mostly not charge less than 15%per annum.
What is the tenor? The NHF confirms borrowers can have up to 30years to repay the loans. Mortgage Institutions on average offs 10-15years. I believe soon they will normalize at 20years.
What percentage of income can I use to repay loans? As a rule of thumb, house related payments such as mortgage, rent should not exceed 30% of a the take home income of any family. When I say family, I mean the Husband and Wife and kids. Anything more than this may put serious financial constraints on the family and may affect their ability to take care of other responsibilities such as education of their kids, food, clothing etc.
A simple table – Where do you fit in?
The NHF indicated it can lend as much as N15m meaning housing acquisitions below this amount is obtainable from the fund. Consequently, it is assumed that Mortgage Institutions can match that figure. It is important to note that in most cases the home owner may have to provide between 20-40% in equity. Meaning a mortgage loan of N10m must be accompanied with equity of at least N2.5m. Therefore, the table below assumes that it cost 10% to borrow from NHF and 15% from a Mortgage Institution. It also assumes that 30% of income will be the maximum used for mortgage repayments. Based on this we can estimate the impact of mortgage loans from between N5m to N15m on income. All loans are also assumed for a tenor of 20years.
From the above a mortgage loan of N5m will entail a monthly repayment of N48,251.08 monthly if the loan is obtained from the NHF. Therefore, this loan is most suitable for a take home salary of not less that N160,836.94. For a mortgage loan financed by a financial institution, the repayments is N65,839 and suitable for a salary of not less than N219,464. Interesting isn’t it? Where do you think you fit in? Try using this amortization schedule for more scenarios.