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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