How CBN’s mortgage interest rate cap removal will impact housing delivery

This might not be the best of times for prospective homeowners and developers, following the apex bank’s recent removal of interest cap rate on mortgage finance for primary mortgage banks in the country.

The impact of the action, housing experts said, could further increase interest rate charged by the banks and worsen accessibility to housing finance by Nigerians. Before the Nigeria Mortgage Refinance Company (NMRC) started the refinancing of some of the banks, interest rate rose to between ‘22 and 26 per cent’ but since the start of refinancing, most of the banks giving the loans were getting back to 17 and 17.5per cent rate in the market for commercial mortgage institutions.

Despite the existing order, most Nigerians couldn’t avoid taking home mortgages from PMI, which is one of the surest and easiest ways of owning your own home due to high interest rates. Statistics show that with over 17million housing deficit, less than 50,000 citizens have access to housing finance.

The mortgage market is a place where the lending institution directly loans money to the borrower, or the person seeking to purchase a house or property. The lender is responsible for drafting the contract and creating the terms of the loan. The Central Bank of Nigeria (CBN) had removed the interest rate cap regulation and lending fees for mortgage financing in the country recently. The bank said the move was due to “some implementation challenges” regarding the mortgage finance section of its 2017 “Guide to Charges by Banks and Other Financial Institutions in Nigeria.”

It stated that henceforth the section of the document that deals with mortgage financing has been amended, and now has the word, “negotiable” to replace the interest rate cap. “The CBN in 2017, issued the Guide to Charges by Banks and Other Financial Institutions in Nigeria, to moderate charges on various products and services offered by banks and Other Financial Institutions (OFl’s) in Nigeria.

“Our attention has been drawn to some implementation challenges in respect of Part 2 Section 2.1 .3 (Mortgage Finance) in respect of the maximum cap of MPR + five per cent placed on mortgage finance rates. The CBN after due consideration of the concerns of stakeholders, hereby amend Part 2 (A & B): interest Rate and Lending Fees “Subsection 2.1 .3” Mortgage Finance to read “Negotiable”. Please note that “subject to a maximum of Monetary Policy Rate + five per cent” is no longer applicable. This new provision took effect from September 9.”

On the implication of the new policy on housing, a mortgage bank operator who pleaded anonymity explained that the rate would now be determined by the risk profile of the intending customers or investors. The source explained that high-risk profile projects, would lead to higher interest rate while low risk projects would bring about a lower interest rate.

“Removing the cap would still mean that the market would determine the interest rate. In the interim, initially the rate would go up. This would help the mortgage banks to reduce their exposure and reduce non-performing loans. The interest rate will be market driven. “Customers with loan-to-value of greater than 70per cent would be required to access the Mortgage Guarantee Scheme. The cap was introduced in 2017 but wasn’t really enforced. In my opinion, this is removing a redundant guideline.”

In his views, a past president of the Nigerian Institution of Estate Surveyors and Valuers, Mr. Joe Idudu said the implication is to further kill the mortgage industry in Nigeria and reduce the effect of mortgage. “Instead of the apex bank moving the mortgage industry forward, the new policy means that the interest could be any amount now and so anybody could charge anything. That is most unfortunate because we really need to develop our mortgage industry so that young people could borrow and build at a sensible interest rate. The policy is saying that saying anybody who is providing money to loan could negotiate.

“I have always-express concerns about the housing deficit especially in our urban areas. It is obvious that the lack of an effective mortgage system is the cause of the entire problem in Nigerian housing sector. You can’t call a lending that is over 20 per cent interest rate, a mortgage. You can’t call a loan that is for between four and five years a loan. Mortgage must be over a long period of time.”He emphasised that the way to encourage every citizens to own their own homes is to ensure that there is an effective mortgage based on policy that works and the mortgage is made available to people once they have employment and paid salary regularly so that they deduct mortgage obligations at source.

He explained many of the developers executing projects with borrowed money but look forward to buyers may discover at the end of the day that many of buildings would remain untaken. He posited that if many buildings are left untaken that means new one would not come up.”Contributing, the past chairman of the Apapa branch, Nigerian Society of Engineers, Dr. Ombugadu Garba said the interest rate could be at lower rate than what is in operation if the operators could fine-tune it.He added that it would be a very good policy that could help civil servants and those who are sourcing funds for their mortgage houses if well implemented.

“Government should lay a good foundation that encourages people to borrow money and build house before retirement. The point remains that if you are bringing a policy, you have to anticipate the challenges that may arise in the cause of implementation. One problem of the civil servants is that when you are not sure of where to lie your head after retirement, is the root of corruption to get extra source of income through illegal means”, he stated.

Similarly, the President, Nigerian Institute of Building, Mr. Kunle Awobodu said mortgage financing was a brilliant idea when it was introduced but expressed concerns that the challenge for the housing sector has been on its implementation. He stated that the impact of the policy would be felt by the effectiveness in the implementation process by the operators.