So you are probably keen on real estate and don’t know how it will even come about because the gap between your savings, income and how much you need for a home is just a bit too wide. That is if you are aiming to buy property in Nigeria. Mortgages are not a popular tool in the real estate business in Nigeria. Normally, mortgages are ideal for aspiring property owners but for a number of reasons, some of which are enumerated here, they just do not fly in Nigeria. Many who have tried have found that the hurdles do not make it a worthy process.
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Then again this what you must know about mortgages if plan to go through with it at any point (I honestly hope you do not)
- Real estate agents and property lawyers: Real estate agents and property lawyers are a major cog in the process and you will do well to have one of either that you trust. One of either will likely know the other so you will be fine anyways.
- Mortgage Originators: These are typically mortgage harbingers and in our case here in Nigeria, these are usually banks and the National Housing Fund (NHF). States such as Lagos and Ogun with lively real estate markets operate housing funds of their own which are mostly accessible to government workers.
- Interest Rate: This is where mortgages get tricky. In the West, interest rates stay generally around 5% or under for loans and mortgages tend to mirror that arrangement. In Nigeria, loans are a non-starter with rates in the double digit range. Mortgages themselves do not carry less than 15% in interest rate and could be more than 20% depending on which bank you look to and what your credit rating is. This is why loans and mortgages via formal financial means are a non-starter in Nigeria. Banks will tell that the interest reflects risk attached to the loan and you cannot begrudge them if you know about the Nigerian financial system and real estate market.
- Tenor: Tenor refers to the period of time within which you are to repay a loan or in this case, mortgages. They usually vary between 15 and 30 years. The longer the tenor, the lesser the monthly or yearly payouts via principal and interests. The heavy interest rates mean that, however you look at it, your accrued interest rate on that will add up to more than even the principal at the interest rates we operate in Nigeria. A loan of 10 million naira repayable at 15% per annum over 15 years would work out to a total interest of 22.5 million naira and at over 30 years would amount to 45 million naira. Crazy! I know.
- Equity: Banks and mortgage originators generally require you provide 30% of the value of the property you intend to purchase. Some require you provide 40% even. This what is known as equity in mortgage. To be safe you will have to make sure the equity you are bringing dwarfs your mortgage by a far margin. If you need 100 million naira to acquire a piece of real estate, ensure you have at least 70 to 80 million naira to be safe.
- Location: You may want to consider the potential outlook in value for properties in any area you consider getting a mortgage on. If the value is deemed to go up in the future then you may yet consider going for a mortgage. Ibeju-Lekki has high growth projections in this regard and so may seem like a reasonable venture to get a mortgage on
- Cap Rate: You might want to consider the rental value of the property especially if you intend to rent it out. I expatiated on this in a previous article but cap rates simply means the annual return on investment a property can generate. If a property goes for 100 million naira, at a rental value of 6 million naira per annum, the cap rate works out at 6%. This means a lot for mortgages especially if the cap rate at least dwarfs the annual interest. Otherwise you will be in trouble
- Income percentage: You should not be committing to any loan that would require more than 30 percent of your monthly or annual income as this would allow you attend to other needs. Any mortgage that takes that much of your income must be for a high value property and thus must be a good investment.
- Government levies and taxes: You must be aware of all government levies and taxes with respect to land ownership while chasing a mortgage. Fees in that category include land survey, governor’s consent, land title registration, land use charge (which accrues annually). Legally land belongs to the state government, so you will majorly deal with state agencies hence.
- Capital Gains Tax (CGT) is a tax that is chargeable when a property is sold. If the owner intends to dwell on the property then it does not apply generally.
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