Interest rates

Mortgage underwriters face tough times due to inflation and high interest rates

It’s not the best of times for mortgage underwriters across the country who are currently bearing the brunt of high interest rates that have driven up their monthly contribution, with many companies allegedly repricing their interest, the findings revealed. from Daily Trust on Sunday.

IOur correspondent’s surveys have shown that with the inflationary trend and the high cost of building construction, many mortgage companies have been forced to adjust their interest rates, which has an impact on many subscribers.

The most affected are subscribers with Primary Mortgage Institutions (PMI) and commercial banks who have had to adjust their capital according to the inflationary trend and high interest rates.

Daily Trust reports that the Central Bank of Nigeria (CBN) hiked interest rates three times in 2022 alone.

It first raised rates to 13% in May, 14% in July and 15.5% in October, the highest since 2006.

With this, it means that subscribers who pay a mortgage monthly would have to pay more for the home loan service.

“I used to pay N90,000 a month when I started but now I pay N150,000 a month,” a subscriber with a PMI told our correspondent on condition of anonymity.

It was further found that the principal interest on housing loans from commercial banks was adjusted from 24% to 26%.

“The implication is that if you pay a certain amount per month based on the terms negotiated with your mortgage company, that means you have to pay more,” said an employee of one of the commercial banks.

In addition, experts say that the cost of constructing buildings has also had a negative impact on housing prices.

A leading real estate investment firm, Northcourt, in its 2022 semi-annual real estate market review, reported that the cost of building materials has increased by 14-55% over the past year.

According to the report, 50 kg of cement went from N3, 500 last year to N4000; 9 inch block from N280 to N320; Aluminum roofing sheet (0.55 mm) from N3 800 to N4 500; Cables (6mm/Coil) from N34,200 to N52,000, among other materials affected by runaway inflation.

Experts say this has put pressure on developers and mortgage operators to adjust the terms of the deal, especially in cases where homes have yet to be delivered.

The Bank of Industry recently estimated that Nigeria had a housing deficit of 29 million which would require financing of 21 billion naira to fill it.

Amid the growing deficit, owners of existing homes are not finding it easy due to repricing of loans by mortgage operators.

But operators said the recent approval of guidelines by the National Pensions Commission (PenCom), allowing holders of Retirement Savings Accounts (RSAs) to access 25% of their savings for residential mortgages , would go a long way to cushioning the effect of galloping inflation on underwriting. .

Group CEO, Global Property & Facilities International Ltd, Dr MKO Balogun said mortgage institutions are not adjusting to construction costs but to inflation which he described as a global trend.

He said: “I’m not sure mortgage institutions are adjusting to building costs, but yes to inflation, which is a global trend. However, PENCOM’s recent policy allowing policyholders to use their pension contribution to offset the mortgage will go a long way.

The CEO of SmallSmall Technology, a real estate tech startup, Tunde Balogun, called the current situation unfortunate, saying it’s not easy for subscribers and mortgage banks.

He said: “For banks, they are mainly affected by the cost of funds. Mortgage banks in Nigeria are not as liquid as commercial banks, in fact the majority do not have the capacity to be self-financing as they do not have direct savings deposit products like their counterparts. Thus, they largely depend on internal financing from government agencies such as the Federal Mortgage Bank and the Nigeria Mortgage Refinancing Corporation or from external agencies such as the African Development Bank and the International Monetary Fund.

“Some mortgage banks even source their funds from private organizations at a higher cost. For mortgage underwriters, unfortunately, they bear the brunt of an economic downturn. High inflation reduces purchasing power and brings disposable income to near zero or negative for most households.

Balogun said that while mortgage is meant to be a long-term instrument for housing finance, typically 20 to 30 years with a single digit rate in most developing and developed countries, Nigeria’s mortgage system is still in double digits, which is too high.

“Our mortgages are in double digits, which means that 15-20 year mortgage financing would have eaten away 3 times the value of the asset by the time you are done paying. It is a very high risk business. This is why Nigeria has one of the lowest mortgage penetration rates in the world, less than 1%, and we also have one of the lowest home ownership penetration rates. lowest in the world, less than 15%.

“My position with the use of mortgage as a financing instrument in Nigeria has always been a short-term approach; pay off the mortgage within five years. This will always be my advice to mortgage underwriters at this time, if you can afford it, even if it will require you to sell other property, pay off the mortgage as quickly as possible in order to retain some value on the property. .

Former Nigeria Institute of Building (NIOB) President Kunle Awobodu said it was unfortunate that rising inflation and the devaluation of the naira had made the projection a “failure” in the building world. immovable.

According to him, when subscribers go into real estate with the hope of owning a property at certain rates but along the way, as construction progresses, a high inflationary trend would make the initial subscription devoid of meaning.

“If they are to pay within 10 years, the rate at which the naira fluctuates could affect expected returns. Thus, the interest rate now expected from subscribers may need to be adjusted. It all comes down to the instability of the market. ‘economy.

“Most of these lenders have stable currencies but our own naira, in a few months the value is not stable. So it affects the projection and the interest rate issue, the CBN does not help the The CBN is under great pressure due to the scarcity of dollars and the scarcity of foreign currencies.

He also said the recent release of guidelines by PENCOM for mortgage underwriters to use part of their retirement savings is a major move that would ease the pressure on mortgage underwriters and operators.