Globally, houses are expensive products and, in Nigeria, Africa’s largest economy, houses are luxury items which are affordable and accessible by the rich. A major part of the reason is lack of housing finance, a problem that a functional mortgage system can solve.
In this part of the world, in practical terms, there are no mortgages because what passes as mortgage in this country is neither affordable nor accessible to those who truly need it. It seems a helpless situation, but Tayo Odunsi, CEO, Northcourt Real Estate, says there is a way out.
He says there are ways government can make mortgages available to a greater number of people without increasing the price. It has to do with tax and mortgage interest refund by government.
Odunsi affirms that “houses are expensive capital goods. The median and average price of a US flat and detached house is $313,500 and $377,700 respectively (US Census, September 2016). That is a lot of money, and it is relatively the same story in most parts of the world”.
Consequently, the average Joe doesn’t pay cash down for a home. Since houses ordinarily come with title deeds, this is mortgaged to secure a loan, which typically the buyer cannot really afford.
With an average paying job and many foreseeable working years to go, a working class man should be able to afford a mortgage on a commensurately priced house by simply spreading the payments over a long enough period of time. In most developed countries, this is the case, but in developing or underdeveloped nations, it’s not quite so.
The World Bank computes mortgage depth of countries as a percentage of the mortgage loans availed in comparison to the country’s GDP. The US has a mortgage depth of 75 percent; the UK, 83 percent; Switzerland, 98 percent; and Denmark a whopping 110 percent.
On the flip side of the spectrum, Ghana, Nigeria, Egypt and Tanzania all have a less than 1 percent mortgage penetration. This is not surprising, as Nigeria for example has an average mortgage-lending rate of 24 percent per annum.
Again, the interest charged is not surprising, as banks have to compete for funds with “risk-free” Federal Government bonds – which pay as high as 18 percent, as against their European counterparts whose Eurobonds have a negative yield.
But irrespective of price, in the Netherlands, which has a mortgage depth of 83 percent, mortgage loans for first-time home buyers are fully tax deductible for up to 30 years. This means that as long as the house you are buying is your first and primary residence, the government will refund your mortgage interest payments from your personal income tax that is deducted from source and paid by your employer.
This immediately makes mortgages cheaper, irrespective of the price (interest) charged by the bank. So assuming a Dutch homebuyer pays 40 percent of his or her income as tax, and earns 1,000 Euros pre-tax, meaning 600 Euros post-tax. If his bank charges the conventional maximum of 30 percent of disposable income (post-tax income) as mortgage repayment, this would mean he pays 200 Euros in mortgage repayment.
This means the 200 Euros paid as a monthly mortgage repayment would be sufficiently fully refunded from his tax. It is therefore “free” to take a mortgage, and it would be ridiculous not to do so, all other requirements being met.
Should this law be enacted in Nigeria, where the income tax is about 25 percent of personal income, these would be the statistics: A homebuyer with a post-tax income of N150,000 will pay N50,000 in tax. If he is also charged a maximum of 30 percent of his income in mortgage repayment, he will be paying 45,000 monthly.
Consequently, a fully deductible mortgage policy will just adequately refund his mortgage payment. This immediately makes mortgages affordable, if not free, to home buyers who can fulfill other conditions such as showing a steady source of income for loan repayment.
Now, before you jump to the government’s defence on the tax loss it will have to bear, note that such loss will be on a steady decline after an initial period of policy hype and then stabilization.
As people begin to joyfully take up mortgages for first home purchases, this will create significant competition amongst mortgage providers, thus setting in motion the basic laws of economics. Mortgage prices would have to fall to stay competitive, consequently reducing tax refund obligations of the government over time.
In all, as mortgage prices and tax deductions reduce, mortgage penetration of the adopting country would increase.
Chuka Uroko
