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UNIVERSITY FOR DEVELOPMENT STUDIES
FACULTY OF PLANNING AND LAND MANAGEMENT
DEPARTMENT OF REAL ESTATE AND LAND MANAGEMENT
THE NATURE, CONSTRAINTS AND IMPLICATIONS OF THE CURRENT
MORTGAGE REPAYMENT PLANS IN GHANA
By
JUSTICE AMPOFO AGYEI
SUPERVISOR
(MR. STEPHEN AMEYAW HOD REAL ESTATE AND LAND MANAGEMENT
DEPARTMENT)
A Dissertation Submitted to the Department of Real Estate and Land Management, University
for Development Studies, in Partial Fulfillment of the Requirements for the Award of the Degree
of Bachelor of Science in Real Estate
JUNE 2014
ABSTRACT
Mortgage finance is one source of capital that cannot be ruled out when it comes to housing
finance. It has globally aided many countries in terms of housing finance. A country’s housing
finance system can work effectively if there is/are mortgage repayment plan(s) that would ensure
flexibility in repayment of mortgage loans and encourage supply and demand for mortgage
products.
Objectives: The study sought to find out the types, nature, constraints and implications of MRPs
in mortgage underwriting in Ghana.
Methodology: All the financial institutions which were into mortgage banking constituted the
sample. Six real estate companies were selected for the study by the use of systematic random
sampling technique. A systematic interval value of 27 was obtained using the formula K = N/n=
159/6; where N=population size and n=sample frame.
Findings: The fixed rate method is the commonest method used in Ghana and the three (3) other
repayment plans have evolved from the fixed rate repayment plan. Exchange rate fluctuations,
high interest rates and high house prices result in higher initial monthly mortgage repayment
using the fixed rate repayment plan. The data suggests that about 85% of Ghanaian households
within the low and middle income brackets were disqualified for a mortgage to purchase one
bedroom house which was the cheapest in Accra. .
Recommendation: The government must double its efforts at stabilizing the economy by improving
the cedi’s performance against the US dollar and reducing inflation. There is also the need for further
study to identify new repayment plan(s) that may increase affordability and reduce the income
requirements.
CHAPTER ONE
INTRODUCTION
1.0 Background of study
It is noted that mortgages serve as a good housing financing mechanism (Boamah, 2009). They
have been able to turnaround the housing sector in the developed world (Breuggeman and Fisher,
2011).However, mortgage repayment plans (MRP) are crucial to the success of mortgage
products to both the mortgagee and mortgagor. This is because the repayment of mortgage by the
mortgagor cannot be done without the repayment plan suiting the income flow of the mortgagor
on one hand and the mortgagee on another hand. This is the reason why several mortgage
repayment plans (MRPs) exist in the mortgage market as improvement over each other for the
easy payment of the mortgage debt by the borrower (Breuggeman and Fisher, 2011).
Thus, a MRP can help many people especially the low to middle income class to either qualify
for mortgages or not. All the factors that affect mortgage pricing are reduced to the ability to
service the loan which is often in the form of periodic payments. Lenders measure the ability of
the borrower to repay a loan by the use of Payment-to-income ratio (PTI-R) (BoG, 2007). Thus,
the mortgage instalments are used in determining the ability to pay. Different classes of people
are mostly priced out of the mortgage market (HFC, 2007) in Ghana simply on the basis of the
ability to pay. And, all things being equal; the ability to pay partly depends on the repayment
plan used.
Demand for mortgage is derived from the demand for housing (Breuggeman and Fisher,
2011).Therefore, the housing sector is the final beneficiary if more people are able to qualify for
mortgages. More people would be able to own homes. This would in effect reduce the escalating
housing deficit which Donkor-Hyiaman (2013) estimates at 1.8 million. Thus, the success of the
housing finance system partly depends on the Mortgage Repayment Plan (MRP) in use. The
study therefore seeks to analyse the nature and constrains of the MRPs in use and their
implications on mortgage underwriting in Ghana.
1.1 Problem Statement
Mortgage finance is one source of finance that cannot be ruled out when it comes to housing
finance. It has globally aided many countries in terms of housing finance (Gyamfi, 2003). For
instance, Brueggeman and Fisher (2011) argued that a long commitment of the federal
governments for housing has been achieved by use of the mortgage market. The fact is that
Ghana government’s commitment to housing through the use of mortgages has always failed
(BoG, 2007). Pundits, notably Boamah (2009), link the failure of the Ghanaian mortgage
industry to insufficient regulatory framework and inflation. Donkor-Hyiaman (2013) is also
much more concerned about the interest rate (borrowing rate) and its disparity from the Bank of
Ghana’s base rate. Interest rates for mortgages are as high as 29%; this is almost a double of the
16% (BoG, 2014) base rate of Bank of Ghana.
All the facts above reduce to the ability to pay which partly depends on the MRPs in use. Thus, a
MRP can help many people (especially the low to middle income class) to either qualify for
mortgages or not. It appears the current MRPs are not suitable for the income levels of many
Ghanaians given that a significant proportion of the working class do not qualify for mortgage
products. It is therefore necessary to question the nature and/or kinds of MRPs used in the
country. Do they suit the income levels of the average Ghanaian worker? In other words if the
MRPs do not help the borrowers (potential mortgagors), they cannot service their loans without
default occurring. Geltner et al (2001) noted that default puts the lenders’ money in jeopardy
therefore they never want default to occur. As noted earlier in the background, suitable MRP aids
the mortgagor so that he can keep servicing the mortgage till maturity. The question that may
arise is that, are the MRPs suitable for both lenders and borrowers? And if that is the case, what
is the implication for mortgage underwriting in the country? The study therefore seeks to find
empirical answers to the following questions.
1.2 Research questions
From the foregoing, the following research questions would be addressed specifically:
1. What mortgage repayment plans are currently used in Ghana?
2. What is the nature of these mortgage repayment plans?
3. What are the constraints in the mortgage repayment plans?
4. What are the implications of the mortgage repayment plans for mortgage underwriting in
Ghana?
1.3 Research aim and objectives
The study ultimately seeks to find out the nature, constraints and implications of the mortgage
repayment plans currently used in Ghana. To achieve this, the study seeks to adopt the following
objectives:
1. Ascertain the mortgage repayment plans used in Ghana.
2. Determine the nature of the mortgage repayment plans.
3. Find out the constraints of the mortgage repayment plans in Ghana.
4. Find out the implications of the mortgage repayment plans in mortgage underwriting in
Ghana.
1.4 Scope of the study
The study focuses on the supply side of the mortgage market in Ghana. It focuses deeply on the
nature, types and constraints of the mortgage repayment plans in Ghana. The study examines the
vital components of the mortgage repayment plans and the implications of those components on
the development of the mortgage market. Experimental evidence in this report relate to the Accra
metropolis where the researchers gathered most of the primary information. This was due to the
fact that information concerning the mortgage market can be obtained at the lenders head offices
in Accra.
1.5 Significance of the study
This study will generally add up to knowledge in the area of the mortgage types we have in
Ghana. Even though several studies have been carried out around the region of the subject
matter, very little is known about the nature and implications of mortgage repayment plans in
Ghana. The study is therefore intended to examine the commonly used mortgage repayment
plans in Ghana. It is expected that the findings of this study would serve as a reliable source of
information and useful guide for the emerging mortgage-market in Ghana.
This study will benefit the government and the mortgage lending institutions on how mortgage
products can be structured to ensure easy repayment whiles ensuring that the mortgage lending
institutions are not deprived of capital urgently needed for reinvestment.
For the purpose of academia, this study will serve as secondary data for future research. Pertinent
issues that need to be examined in order to promote the mortgage industry are raised and
discussed.
CHAPTER TWO
RESEARCH DESIGN
2.0. Introduction
This section discusses the research procedures that were adopted to carry out the study. It mainly
focuses on the population and types of research conducted. It emphasizes on the sources of data,
population, and sample size, sampling method, data collection tools and analysis of data in
relation to the study.
2.1. Types of data
Types of data for this study consisted of both primary and secondary data.
2.1.1. Primary data
Both qualitative and quantitative data were collected for the purpose of this study. Qualitative
data including mortgage repayment plans, types, constrains and nature were collected from the
selected financial institutions under study: Ghana Home Loans (GHL), Home Finance Company
(HFC), CAL Bank (Cal Mortgage), Stanbic Bank and Fidelity Bank. Quantitative data included
house prices, interest rates, and mortgage terms. These were gathered to help make a thorough
and reliable analysis on repayment plans used by the banks. Data on house prices were collected
from the selected real estate companies (RegimanuelGray Limited, Vanguard Properties, Castle
Gate Estates, Afariwaa Estates, Lakeside Estates and Manet Housing Limited) to help make
analysis on the various repayment schedules. The house prices ensured the establishment of
mortgage amounts based on mortgage LTV-Ratio to will-be potential borrowers.
2.1.2. Secondary data
Literature review was carried out to highlight related issues from previous works of other
researchers. Secondary data from newspapers, journals, magazines, textbooks, internet
(websites), articles and annual reports were used for the study. Secondary data collected included
different mortgage repayment plans adopted by mortgage institutions in different economies,
their characteristics and constraints as well as the history and operations of the mortgage
institutions. Also, literature on the nature of the housing finance system adopted by other
countries was consulted and used in this study. Furthermore, income levels were collated from
the reports of the Ghana Statistical Service (GSS).
2.2. Sampling design
There are many financial institutions in Ghana. However, for the purpose of this study, only
mortgage banking/financial institutions in the mortgage industry formed the population under
study. These were: Ghana Home Loans (GHL) (Head Office), Home Finance Company (HFC)
Bank, CAL Bank (Cal Mortgage), Stanbic Bank and Fidelity Bank. This is deemed adequate
since a similar study used only three banks in the mortgage industry (Mubarak, 2013).These are
the major players in the mortgage loan business in Ghana. All the financial institutions who are
into mortgage banking constituted the sample. Hence there was no need of sampling because the
whole population was under study. This is because there are a limited number (5) of financial
institutions that are into mortgage lending and all of them were interviewed. Hence, the sample
size represented the identified population (the mortgage banks).
Also, six (6) out of 159 (GREDA, 2013) Ghana Real Estate Developers Association registered
members were selected, namely: RegimanuelGray Limited, Vanguard Properties, Castle Gate
Estates, Afariwaa Estate, Lakeside Estates and Manet Housing Limited. The selection of the 6
companies was done by the use of systematic random sampling technique. A systematic interval
value of 27 was obtained using the formula K = N/n= 159/6; where N=population size and
n=sample frame. The interval value was to help select the 6 companies systematically at each
interval of 27 from an arranged population of 159 companies.The first company (Regimanuel-
Gray Limited) from the arrangement was given the maximum chance to be selected randomly as
the head point of the process. A similar study conducted by Asamoah (2010), used only four (4)
Estate Companies in the study and outlined the fact that they are all located in Accra (within the
scope of study).
2.3. Data collection tools/techniques
Both close-ended and open-ended questionnaires were used for this study. Open ended
questionnaires were administered to both the financial institutions and the real estate companies
to give their stated opinion deemed appropriate and relevant on mortgages and its related issues
and real estate house prices respectively. Additionally, close-ended questions were administered
to the financial institutions and real estate companies to choose the most appropriate from the
possible answers.
The questionnaires were self-administered to mortgage/loan officers at the various institutions
for reliable and exact information. Respondents were relatively given a chance to respond to
questions at their convenient time given the busy nature of office schedules relative to the
tedious nature of questionnaires which demand some couple of time. At the real estate sector,
questionnaires were administered by face-to-face interviews with officers in charge of sales and
marketing where questions were read directly to respondents to offer exactly the same questions
in the same order to avoid any contextual errors. Other house prices were obtained from soft
copies and magazines of the companies (as secondary data).
2.4. Data Presentation Tools and Analysis
Data presentation was basically by descriptive and qualitative methods. Tables were used to
present data. .
The data collected were, edited, coded and entered using tables to explain the results in relation
to the research objectives. Qualitative data collected from the research was organized and
presented in the form of comprehensive notes.
Coding was used as an interpretive technique that organized the data and provided a means to
introduce the interpretation. The coding technique required reading the data collected and
demarcating segments within it. Each segment in the data was labelled with a code that
suggested how the associated data segments informed the research objectives. The codes were
used to discuss similarities and differences across distinct sources or comparing relationships
between one or more codes.
CHAPTER THREE
THEORETICAL FRAMEWORK
3.1 Mortgage Market in Ghana
According to the Ghana Mortgages Decree, 1972 (NRCD 96) a mortgage is defined as: “A
contract charging immovable property as security for the due repayment of debt and any interest
accruing thereon or for the performance of some other obligation for which it was given, in
accordance with the terms of the contract”.
The state of the Ghanaian mortgage market is arguably discouraging due to the fact that interest
rates for mortgages are as high as 30%; this is almost a double of the 16% (BoG, 2014) base rate
of Bank of Ghana. This, coupled with many unfavourable mortgage repayment plans has
contributed to the failure of the Ghanaian mortgage system. The above situation has also been
blamed primarily on low affordability levels as a result of low income levels. There is therefore
the rising need to work tirelessly to create an enabling environment and develop a Ghanaian
friendly mortgage repayment plan to help salvage this situation.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.0 Introduction
This chapter presents the data from the field. It is further classified into sub headings which consist of
background of the mortgage institutions, background of the estate companies; types of mortgage
repayment plans, nature of the repayment plans, constraints of the repayment plans and implications of
the repayment plans in mortgage underwriting for the Ghanaian housing finance market.
4.1 Background of institutions under study
4.1.1 Background of the mortgage institutions
The mortgage lending institutions under study were; HFC Bank, Fidelity Bank, Ghana Home Loans, Cal
Bank and Stanbic Bank. The background of these mortgage lending institutions are represented in table
4.1 (see appendix 1).
The table shows that all the five mortgage lending institutions have almost the same mortgage products.
Also, three of the lending institutions require a minimum down payment of 20% except CAL bank and
Fidelity bank that require a minimum of 15% and a maximum of 25% respectively. The lending
institutions require an age range of 18-65 years to be eligible for a mortgage loan. Again, four out of the
lending institution do not charge facility fee but charge origination fee for a maximum of 2%.The lending
institutions charge valuation fees based on the discretion of the valuation officer.It is only Ghana Home
Loans that charges from $300-$500 as valuation fees. Furthermore, a maximum of 75%-85% of the
property value is advanced as loan to prospective mortgagors by the banks. Moreover, a maximum of
0.2% of property value is required as property insurance fee by the mortgage lending institutions,
although property insurance value is also based on the discretion of the insurance companies. The
mortgage repayment term for the mortgage institution ranges from 5-20 years with an interest rate of 13%
-14% for US dollar loan and 26% -29% for Ghana cedi loan. (See appendix 1)
4.1.2 Background of real estate development companies under studyThe estate companies under study were Regimanuel Gray Limited, Manet Housing Limited,
Vanguard Property Development Limited, Afariwaa Estate, Lakeside estate limited and Castle
Gate Estate Limited. The background of these estate companies are shown in the table below.
Table 4.2: Background of the real estate development companies Companies
Items
Regimanuel Gray
Manet Housing
Vanguard Property Development
Afariwaa Estate
Lakeside estate
Castle Gate
Year established
1991 1994 2012 2006 2005 2008
Units provided yearly
15 80-100 --- 20 --- ---
Source: Field Survey, MAY 2014
Table 4.3 presents the range of house prices of the selected estate companies of the categories of home
products they offer
Table 4.3: Range of house prices with land area from field survey
House type House prices
1 bedroom semi - detached house (40 feet by 60 feet) land size
$34,000
2 Bedroom semi - detached house (40 feet by 60 feet land size)
$55,000-$90,000
2 Bedroom detached house (50 feet by 60 feet land size)
$60,000-$150,475
3 Bedroom semi - detached house (60 feet by 85 feet land size)
$70,000-$165,000
3 Bedroom detached house (80 feet by 100 feetland size)
$85,000-$243000
4 Bedroom detached house (80 feet by 120 feetland size.)
$150,000-$215,000
4.2 Mortgage Repayment Plans Mortgage repayment plans used by the mortgage lending institutions under study is summarized
in the table below.
Table 4.4: Repayment Plans used in Ghana by the mortgage lending institutions
Mortgage institutions Repayment Plans
Ghana Home Loans Reducing balance method
Variable rate method
Fixed rate method
Fidelity bank Fixed rate fixed payment method
H.F.C Bank Reducing balance method
Flexible rate method
CAL Bank Adjustable rate method
Fixed rate method
Stanbic Bank Variable rate method
Reducing balance method
Source: Field Survey, MAY 2014
The repayment plans used by the various lending institutions represented in Table 4.4 above are
designed and adopted to suit their clients’ income levels and their ability to repay their
mortgages conveniently. 4 out of the 5 banks use the fixed rate method which happens to be the
most prominent repayment method that is commonly used to secure mortgagors against interest
rate hikes.
4.3 Nature of the mortgage repayment plans
Every repayment plan has an exclusive nature. The three repayment plans (fixed rate, variable
rate and reducing balance) are used by the lending institutions to provide alternatives for various
income earners to ensure convenient and easy repayment of mortgages. Though there are general
characters that each payment method exhibits, lending institutions have some varying nature and
component to their types used (See appendix 2). Each repayment plan has its respective
flexibility and suitability component.
4.3.1 Strengths and weaknesses of MRPsThe mortgage repayment plans used by the lending institutions has their own pros and cons. The
pros and cons cuts across all lending institution for any repayment method(s) used. With the
fixed rate payment method, lenders are certain of the exact amount borrowers are expected to
pay periodically but it is disadvantageous in times of rising market rate because it devalues the
lenders mortgage capital value when market rate rises. Again, the reducing balance reduces the
principal balance periodically but the higher initial repayment makes it expensive in the short-
run. Also, the adjustable rate method is used during market rate fluctuation to ensure borrowers
repay their mortgages conveniently in response to the current market rate, although a high rise in
market rate can result to borrowers default(See appendix 3).
4.3.2. Mortgage Underwriting criteria of financial institutions
The basic underwriting requirements indicated by each responding institution are presented in
table 4.6 below.
TABLE 4.7: Underwriting criteria for the mortgage lending institutions
Institution Underwriting Criteria
Ghana Home Loans Payment –to- income ratio Loan to value ratio
Ability/willingness to pay
Total commitment
Credit history
Fidelity Bank
Both Ghanaian and Non Ghanaian resident
18yrs and above
Verifiable employment and income
Home Finance Company Bank Payment –to-income ratio Credit worthiness
Loan-to-value ratioCAL Bank Loan-to-value ratio
Age 21-55 Credit history Payment-to-income ratio
Stanbic Bank You need to be over the age of 21 but not more than 60 years by facility maturity
A Ghanaian citizen or permanent resident of Ghana
Existing Stanbic Bank customer Be permanently employed continuously
for at least 2yrs A non-account holder need to have a
workplace banking schemes Source: Field Survey (2014)
The table above presents the underwriting requirements of each lending institution. All the five
lending institutions consider the mortgagor’s payment to income ratio, loan to value ratio, credit
history or worthiness as common criteria for mortgage underwriting in Ghana. Only Fidelity
bank gives the opportunity to both Ghanaian and non-Ghanaian residents to qualify for a
mortgage. A non-account holder in order to qualify for a mortgage at Stanbic bank would need to
have a working banking scheme and also be permanently employed continuously for at least two
years. Although age range of 18-25 years qualifies a person for a loan (per the banks criteria for
eligibility), persons within this age group would rationally not go in for a mortgage looking at
their level of income.Although there are similarities in the criteria used by the various banks, it is
realized that each lending institution has something peculiar. This makes the Ghanaian mortgage
underwriting system not standardized.
4.4 Constraints of the repayment plans
4.4.1 Exchange rateA bank’s report from the field survey stated that, “the mortgage business is currently dying out
due to exchange rate fluctuation”. The bank indicated that most of the estate developers in Ghana
price their properties in US dollars which are unreasonably high as compared to the Ghanaian
cedi currently. Hence the average Ghanaian worker finds it difficult to acquire a mortgage to
purchase these houses. Also, another bank reported that “USD repayment plan is very
convenient; however the cedi seems hard on the mortgagor due to current interest rate and
unstable standard of living”.
As a result of this exchange rate fluctuation, low to middle income earners who are paid in cedis
mostly are not able to meet the exchange rate in the market. The dollar priced houses compel
lenders to structure their repayment plan to be able to make up with the exchange rate
differences.
This is because the worker earns in cedi and would need approximately 3 times each cedi to
make $1. This situation makes it difficult for an average Ghanaian who earns below
GH₵1,500.00 to even purchase a one bedroom home which is currently priced at $34000 (see
table 4.3) in the property market.
4.4.2 Interest rateAs indicated in table 4.5, an unexpected increase in interest rate in the market decreases the
market value of mortgages, especially with the fixed payment methods. As this benefits the
borrower because s/he enjoys below-market financing, it is rather a disincentive to the lender due
to the resultant decrease in market value of the loan. However, a reduction in interest rate will be
disadvantageous to the borrower because he/she would end up paying over and above what
should have been paid currently in the market.
The adjustable or variable payment methods become uncompromising to both the lending
institutions and the mortgagors interest rate fluctuations. This is because when interest rates
shoot up, the payment for an adjustable payment mortgage will increase accordingly. When this
happens there will be difficulty in repayment on the part of the mortgagor due to the rise in
payment pattern.
4.4.3 Mortgage termFrom the field survey most of the lending institutions’ maximum mortgage term is 20 years (see
table 4.1 in appendix 1). As it appears, interest rates are higher on longer term loans than on
shorter term loans. But longer term loans are very convenient in terms of repayment given the
mortgagor an ample time to repay the loan. Monthly payment is significantly higher on short
term loans than on long term loans because of its short term nature. This may restrict home
buyers to smaller houses than they might have been able to afford with longer term loans.
4.5 Implications of MRPs
4.5.1. Analysis of repayment capabilities of various income brackets of Ghanaian workersTable 4.8 presents the analyses of the implications of the widely used fixed rate method on
mortgage underwriting in Ghana as well the reducing balance and the adjustable rate. Holding all
other underwriting criteria on table 4.6 constant, the analysis is to ascertain the qualification for
mortgage using only the payment-to-income ratio. It uses real house prices for four categories of
standard contractor built housing units obtained from estate developers in Accra (see table 4.7
below).
Table 4.8. House prices for all the housing units from all developers contacted
CATEGORIES OF HOUSES
AFARIWAA ESTATES
CASTLE
GATE ESTATES
VANGUARED PROPERTIES
LAKESIDE ESTATES
MANET
ESTATES
REGIMANUEL GRAY
ESTATE
1 BEDROOM
- - - $34,000 - -
2 BEDROOM
$75,000 $70,000 (semi-detached)
$90,000 (detached)
$55,000 (semi-detached)
$60,000
(detached)
$76,000 (semi-detached)
$90,000 (semi-detached)
$83,400 (semi-detached)
$150,475 (detached)
3 BEDROOM
$165,000 (semi-detached)
$195,000 (detached)
$120,000 (detached)
$70,000 (semi-detached)
$85,000 (detached)
$90,000 (semi-detached)
$95,000 (detached)
$120,000 (semi-detached)
$160,000 (detached)
$234,000 (detached)
4 BEDROOM
$215,000 (detached)
$150,000 (detached)
$200,000 (detached)
$190,000 (detached)
$200,000 (detached)
-
Table 4.9: Illustrative Home Affordability Calculations for a Contractor Built Core Unit financed by a Mortgage
STANDARD HOUSE TYPE ON 100M2 PLOT
VARIABLES
1-Bedroom 2-Bedroom 3-Bedroom 4-Bedroom
Minimum House Price (across companies in Accra) GH₵95200 GH₵154000 GH₵196000 GH₵420000
Minimum deposit (20% of house price) GH₵19040 GH₵30800 GH₵39200 GH₵84000
Typical Amount borrowed (80%) GH₵76160 GH₵123200 GH₵156800 GH₵336000
Maximum term 20 20 20 20
Interest 29% 29% 29% 29%
Monthly repayment (fixed rate) GH₵1847 GH₵2987 GH₵3802 GH₵8146
Monthly repayment (reducing balance method) GH₵1828 GH₵2947 GH₵3749 GH₵8036
Monthly repayment (variable rate method) GH₵1660 GH₵2685 GH₵3417 GH₵7323
Monthly income of typical low income households GH₵500 GH₵500 GH₵500 GH₵500
Monthly income of typical moderate/middle income earners GH₵2000 GH₵2000 GH₵2000 GH₵2000
Maximum payment to income ratio of lenders 35% 35% 35% 35%
Payment-to-income ratio of low-income households (FR) 369%
(RB) 366%
(VR) 332%
597%
589%
537%
760%
750%
683%
1629%
1607%
1465%
Payment-to-income ratio of middle-income households (FR) 92% 134% 190% 407%
(RB) 91%
(VR) 83%
147%
134%
187%
170%
402%
366%
Estimated share of low/middle-income households
in population (URBAN GHANA)
Low (35%)
Middle(50%)
85%
85% 85% 85%
4.5.2. Analysis
Field survey indicates in table 4.8 that, the minimum price for a one, two, three and four
bedroom(s) currently in theGhanaian property market is priced atGH₵95200, GH₵154000,
GH₵196000 and GH₵420000 respectively. The mortgage lending institutions on the other hand,
averagely require that borrowers make a minimum down payment of 20% of property value in
order to advance 80% of the property value as loan to prospective home buyers (borrowers), who
seek a mortgage to purchase such a house with a maximum interest rate of 29% for fixed rate and
reducing balance; and 26% for adjustable rate (due to future payment adjustments in respect of
market rate movements). Also lenders require a maximum payment to income ratio of 35%.
The table(4.8) above clearly shows that monthly payments for a one bedroom house priced at
GH₵95200 using the fixed rate, variable rate and the reducing balance method are GH₵1847
(see appendix 4), GH₵1660 (see appendix 5) and GH₵1828 respectively. Given that the
maximum payment to income ratio that lenders require is 35% of borrowers’ monthly
income.With the income levels of low and middle income households who earn GH₵500 and
GH₵2000 respectively (UN-Habitat,2011), payment to income ratio with respect to the above
monthly payments for the various mortgage repayment plans will be 369% , 366% and 332% for
low income households using fixed rate, reducing balance and variable rate method
respectively. It is important to note that payment for variable rate mortgages may change in the
future in response to changes in the prevailing market rate. These figures exclude other cost of
borrowing like valuation, origination and legal fees. These figures (369%, 366% and 332%) far
exceed the repayment ability of the low income households and even the middle income
households. Their GH₵500 and GH₵2000 monthly income cannot service the mortgage because
middle income earners’ payment to income ratio for the various repayment plans will be, 92%,
91% and 83% respectively of the fixed rate, reducing balance and the variable rate repayment
methods. Households (low and middle earners) would have to pay more than their monthly
earnings and will therefore not qualify them for a mortgage to purchase a one bedroom house in
Accra which is priced at a minimum of GH₵95200. This shows that about 85% (UN-Habitat,
2011) of households cannot afford the cheapest estate-developer house in Accra. The study
indicates that the two bedroom, three bedroom and four bedroom houses that the estate
developers provide are beyond the reach of the low and middle income households
Fidelity bank with an interest rate of 29% and a maximum term of 20 years, require a minimum
monthly income of GH₵4564 in order to advance 80% of GH₵95200 as loan to purchase a one-
bedroom house, and a monthly income of GH₵7392 to advance 80% of GH₵154000 mortgage
to purchase a two bedroom house. They also require a monthly income of GH₵9408 to advance
80% of GH₵196000 to purchase a three bedroom house. Again Fidelity bank requires a
minimum monthly income of GH₵20159 in order to advance 80% of GH₵420000 to purchase a
four bedroom house. All these income requirements for the above loans do not favour the low
and middle income households in Ghana. The studyfurther revealed that 3%-6% of the qualified
borrowers end up defaulting (as reported by all the five lending institutions). As a result, the
estate developers targets Ghanaians living abroad who can afford these houses. This is so
because the characteristics of the traditional mortgage market do not suit the conditions of the
low and middle income households working in Ghana. This implies that the future of mortgage
underwriting in Ghana is very oblique.
4.6. ConclusionField survey revealed that most of the lending institutions compute their mortgage repayment
using the fixed rate repayment method as compared to the other repayment plans with the
exception of Stanbic bank that specializes in the reducing balance repayment method. Also, the
mortgage repayment plans are limited in their ability to serve low and middle income
households. This is as a result of the fact that the payments to income ratios are too high and as a
matter of fact low and middle income households may need to pay amounts that exceed their
monthly income. In addition, the unstable macro-economic environment, especially exchange
rate fluctuations and high interest rates,makes the existing repayment plans less useful to many
Ghanaian households. This has made mortgage financing unattractive venture for low and
middle income earners.
CHAPTER FIVE
SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.0 Introduction
The main purpose of this study was to determine the nature, constraints and implications of the
mortgage repayment plans in Ghana. The data for the study was acquired through a questionnaire
survey of the entire mortgage lending institutions in Ghana and six (6) private estate developing
companies. The findings, recommendations and conclusion of the study are presented in this
chapter.
5.1. Findings
The reducing balance, fixed rate and the variable repayment methods are used by the
mortgage lending institutions in Ghana. These are designed and adopted to suit their
clients’ income level and their ability to repay their mortgages conveniently. The fixed
rate method is the commonest method used in Ghana and the other repayment plans
evolved from the fixed rate repayment plan
Underwriting requirements of mortgage institutions do not suit the conditions of the low
and middle income households because their payment to income ratios are very high as
compared to the lenders required payment to income ratio of 35% of their income.
MRPs are vulnerable to exchange rate and interest rate fluctuations.
The fluctuating economic environment especially exchange rate fluctuations and high
interest rates have resulted in lending institutions choosing their clients. Hence they give
mortgages to a particular income group that is prospective home buyers that earn above
GH¢4300 because, their income level will qualify them for a mortgage currently in
Ghana.
The cheapest contractor - built unit in Accra is beyond the reach of 85% of Ghanaians;
who currently belong to the low and middle income class and are living in Accra (urban
Ghana). This is because their incomes will not qualify them for a mortgage to purchase a
one bedroom house which is the cheapest in the market. This means that the future of
mortgage underwriting in Ghana is very oblique.
5.2. Recommendations
The findings show that the mortgage repayment methods used in Ghana currently is not favoring the low
and middle income households because prices of contractor – built units are too high. The situation can be
improved upon and mortgage repayment made affordable if the interventions discussed below are
considered.
The government must double its efforts at stabilizing the economy by improving the cedi’s
performance against the US dollar and reducing inflation. With these factors improved and the
economy stable, investment in the mortgage market would be improved since risk levels would
be lowered. It is therefore important for policy makers to focus on stabilizing the macro-
economic environment.
The study shows that mortgage finance cannot address the housing challenges of about
85% of Ghanaian households.It will therefore be advantageous to encourage the use of
personal loans for low and middle income households that allow them to build their own
homes incrementally. This will be very much achievable with housing micro-finance
since some of these households who do not qualify for mortgages already own homes
acquired through this approach.
A change in market interest rate is a constraint to mortgage lending institutions
especially when market interest rate rises with the fixed rate payment method. There
should be an existence of a secondary mortgage market where mortgagees can sell their
mortgage obligations in order to manage this interest rate risk.
There is the need for further studies to develop new repayment plan(s) that may increase
affordability and reduce strains on income qualification requirements. It will be of
relevance for further research in mortgage pricing, mortgage demand, affordable housing
provision and capital market development. A careful assessment of these related areas of
research would help develop a workable mortgage finance system for Ghana.
5.3. Conclusion
This study sought to find out the nature, constraints and implications of the current mortgage
repayment plans in Ghana. It was established that the fixed rate payment method is generally
used and the other three (3) evolved from the fixed rate. Although various repayment plans were
provided by the lending institutions to ensure flexibility in payment according to the income
levels of their clients, the survey revealed that repayment plans are very vulnerable to exchange
rate and interest rate fluctuations. Moreover the income levels of the low and middle income
households do not qualify them for mortgages to purchase the cheapest housing products offered
by the private estate developers. There is therefore the rising need to work tirelessly to create an
enabling environment and develop a Ghanaian friendly mortgage repayment plan to help salvage
this situation.
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