Article by George Arkhurst Jnr
A mortgage is defined in simple terms as a loan provided by a lender – in most cases a bank) to buy real estate and payable over a specified period of time at an interest rate. The borrower is required to make regular repayments over the specified period to include the principal and the interest rate. The property purchased serves as the collateral for the loan which can be foreclosed with the lender taking possession of the property if the borrower does not fulfil the terms of the agreement.
The term mortgage was derived from the French words “mort” and “gage” which literally means “dead pledge”. This pledge made is only deemed dead if the pledge is fully paid (in that case, borrower gets pledge) or payment fails (lender gets pledge).
Normally the borrower (person who wants to purchase a property) is requested to make a deposit payment of the value of the property (between 3% to 20%) while the lender (mostly bank) pays the balance of behalf of the borrower. The lender owns the property until full payment is made by borrower before the property is transferred to the borrower.
What are the requirements to qualify for a mortgage?
To qualify for a mortgage, you will need to have the minimum down payment amount (which is normally 20% across banks but may also be lesser), a good credit history with no defaults and a proof of a steady income for repayment. Other requirements may include a collateral such as another property or investment (Note that this is in rare cases though).
Is it advisable to use a mortgage to purchase a property?
I think there are no absolute answers with regards to mortgages however, consider these pointers that will make the decision making easier for you.
Mortgages are normally lengthy commitments which may be between 15 to 30 years. Although it may seem that you may have small repayments spread out within that period, the question remains whether the interest rate will remain stable over the lifetime of the mortgage repayment. You will have to ask the lender whether the interest rate is variable or fixed.
Secondly, can you guarantee that you wouldn’t lose your job as a worker or a steady flow of income as a business owner and thereby missing the payments which could lead to foreclosure of your property? Since no one can predict the future, it is important to consider the risk before making a commitment.
If you are in Africa, it is advisable to ask questions from your bank before taking your mortgage. Note that most banks may give a dollar denominated mortgage or a local currency denominated mortgage which may have a higher interest rate. If you work within the country and earn money in a local currency, be mindful about taking a dollar denominated mortgage as any adverse exchange rate fluctuation will lead to a significant increase in your monthly repayments.
storY #1 – samuel
Let’s look at this example. Samuel took a mortgage in 2020 in dollars and had to pay 600 USD equivalent in Ghana Cedis each month. The exchange rate was 5.65 then, thus he paid 3,390 Ghana cedis each month. As the cedi depreciated against the dollar, his monthly payments increased per month. In 2024, as the exchange rate reached 15.00 cedis to USD 1.00, Samuel had to pay GHS 9000.00 which is 165% more than he was paying in 2020. The question is, will his source of income have increased by 165% within the four years period?
I trust that Samuel’s situation will provide valuable insight for your mortgage decision-making process.
story #2 – melvin
Melvin on the other hand took a local currency mortgage (in cedis) at a higher fixed interest rate (30%) while salary in USD. He purchased a house for 720,000 cedis at the same time Samuel did. He paid 120,000 cedis as a down payment while the mortgage amount was for 600,000 payable over a 20 year period. He pays a monthly amount of 15,040.14 cedis equivalent to USD 2,661.97 in 2020. However, that same money is equivalent to USD 1,002.68 in July 2024. He’s doubled his monthly payments which will allow him to finish paying off his mortgage earlier than the expected 20 year period.
Although paying the mortgage has become an issue for Samuel, it isn’t for Melvin. You should consider all the factors above before deciding whether to go for a mortgage. I would go deeper in sharing more on mortgages and other financial options to consider when buying a house in subsequent articles.
MzGee
July 24, 2024 at 4:16 pm
This is an insightful article for anyone considering the option of becoming a homeowner. I look forward to reading more. Thanks