Home ownership is a coveted dream of almost every individual. Unfortunately, most people are not able to see this dream to realisation due to financial constraints. The importance of mortgage products cannot be undermined since they have proven to be overly reliable in helping provide decent housing for low and middle income groups in many countries.
Despite the overwhelming impact of mortgaging, some countries are unable to tap into the most reassuring means of housing finance. African countries are no exception to this since their financial markets are characterised by high and volatile interest rates, short to medium term lending, mortgage credit deficiencies, embryonic capital markets and a host of other factors that discourage mortgaging. The situation is aggravated in Ghana where Mortgage debt to GDP ratio stands at 0.5%, making it one of the least developed markets worldwide with a wide variation from the African average of 15.7% (CAHF, 2014:84). Mortgage pricing determinants form the core problem of Ghana ’ s low performing mortgage industry and the nature of the mortgage model adopted for pricing has a long-term significant effect on effective mortgage demand.
The nature of the mortgage instrument acceptable for mortgaging varies from one country to the other. In fact the socio-economic, political and cultural make-up of a country needs to be given due consideration in adopting a suitable model for mortgage product offerings. This paper understudies the potential of the Graduated Payment Mortgage in pricing and demand for mortgage products. To achieve this, the study concentrates on middle income earners in Ghana and examines their propensity to afford mortgage products characterised by graduated payments.
The study further employed quantitative and qualitative methods of data collection from both primary and secondary sources and adopted purposive sampling techniques.
The researcher gathered during the study that the unattractive nature of the Ghanaian mortgage market stems from a myriad of intertwined problems. Typical of these are low income levels, high interest rates, unwarranted socio-cultural stigmas on borrowing, high risk of default, expensive mortgage products and high incidental costs.
Regardless of the difficulties of mortgaging in Ghana however, the study reveals that many prospective home owners are willing to accept cheaper mortgage finance products in lieu of incremental development approaches to housing. They expressed particular interest in the graduated payment model which allows for low initial repayments that increase at an agreed percentage over the term of the mortgage loan. Unrealistic assumptions, unpredictable economic trends, long term mortgage credit deficiencies and slow build-up of equity are the major challenges that were identified as capable of stifling the success of graduated payment mortgages in Ghana.
Keywords: mortgage, equity, affordability, housing, graduated payment, fixed rate, housing deficit, securitisation, Mortgage Backed Securities
Ghana like many emerging economies is beset with acute housing shortages. The Ghana Statistical Service (2012) estimates the housing stock deficit to be about 1,600,000 units. In view of this problem, CAHF (2014:85) noted that efforts towards solving the housing problem will require the completion of half a million new rooms per annum or 3.8 new rooms per minute of every working day for the next 10 years. With annual housing demand at 100,000 units and supply at 40,000 units, the housing deficit situation is sure to aggravate. The most common means of housing supply in Ghana is by incremental development which has completion times of between 4 to 15 years. Strategies geared towards solving the housing problem will require the quadrupling of current yearly supply for 10 consecutive years.
In contributing towards resolving this canker, government and its allied public sector institutions have over the years made direct capital investments that saw the development of housing estates and flats across the country. Centre for Housing Finance (CHF) International (2004) however revealed the gross failure of government in housing provision by concluding that past and current direct intervention efforts by government and other stakeholders in the housing market have failed to reach middle and low income target groups or meet housing requirements. With direct governmental efforts proving futile, incremental development impeded by its slow nature, volatile prices of building materials, associated springing up of informal settlements and home ownership rates hovering consistently between from 27% and 32% (CAHF,2014), there arises the need for housing finance mechanisms to salvage the situation.
Housing finance plays an important role in the World Bank’s overall financial sector strategy and is clearly and inextricably linked to the overarching mission of reducing poverty and improving lives (IFC, 2008). The need for housing finance is further asserted by HFC (2007) when they concluded that without financing options, the ownership of formal housing will be beyond the reach of 95% of the population whilst only 60% can afford a house with financing arrangements. This leaves only 5% of the population who are capable of financing housing without any form of assistance and 35% who may never own a house in their lifetime. The use of mortgage finance has proven worthy of emulation and indispensable in resolving housing supply (usually liquidity problems) and demand (qualification and amortisation constraints) needs across the globe.
Mortgaging is essentially the bedrock on which most developed countries including Britain and USA build their economies. However, the success of mortgaging is largely dependent on its nature and affordability for target groups. Housing affordability is measured in terms of the ability of households to have access to adequate shelter and still be able to afford other basic needs including food and clothing. IMFG (2013) summarizes housing to be unaffordable when financial commitments take 40% or more of net household income.
In Ghana today, most middle income households receive monthly incomes of between GH¢1200 ($343) to GH¢2,000 ($572) but such amounts are usually inadequate in securing home mortgage loans giving regard to the average household size, dependency ratios and the cost of living. The unattractive nature of the Ghanaian mortgage market is blamed on the high interest rates, demand for huge down payments, unstable inflationary index, mortgage credit deficiencies, unsuitable mortgage products and extra procedural costs to be borne as a consequence of the securing of a mortgage instrument (Boamah, 2010). Paramount among the mortgage pricing indicators is the nature of mortgage model adopted and its ability to mitigate lender and borrower risk: its unique characteristics can boost or render a promising mortgage industry ineffective (Lea, 2010).
In Ghana, the fixed rate fixed payment mortgage model is predominantly used by lending institutions but it renders product offerings unattractive and expensive. This model by virtue of its pricing methodology essentially shifts both borrower and lender risks to the mortgagor and further concentrates the burden of repayment in the formative years of the mortgage term. It is most suitable for stable economies with very low lending and mortgage origination rates. In volatile economies such as Ghana where base rates are as high as 22% (BoG, 2015), this model discourages borrowing through loan qualification constraints. Resultantly, CAHF (2014) and Grant (2009) indicated that only three percent of households can afford monthly mortgage payments for the least priced house of US$25,000. Without making any down payments, this translates into monthly repayments of US$300 (GH¢1,050) and will require prospective mortgagors to have collective household income of about $750 (GH¢2,625). With middle income household salaries averaging GH¢1,500 it is impossible for prospective mortgagors to qualify for loans without exceeding the allowed loan payment to income ratio of 40%.
Clearly, the fixed rate fixed payment mortgage model is expensive and incapable of housing the average middle income household in the least priced house hence, the need for a flexible mortgage model that can remove the complexities of fixed rate fixed payment mortgages while simultaneously safeguarding the positions of both lending institutions (through improving liquidity and reducing default rates) and mortgagors (through improving affordability). The graduated payment mortgage which is characterised by improved mortgage qualification and lower initial repayments that increase over the mortgage term has been employed in many developed economies including USA to improve home ownership. Studies by Lea (2009) generalised the workability of different mortgage models in emerging economies while scholars including Boamah (2009, 2010) and Ayitey et al (2010) concentrated on primary mortgage lending, housing affordability and feasibility of secondary mortgaging. Little has been done on analysis of repayment models as an integral component of mortgage pricing and testing the performance of affordable models in improving housing affordability.
The study therefore understudies the Graduated Payment Mortgage as an affordable mortgage model and examines its propensity to improve mortgage market development and home ownership. The ensuing sections of the paper discuss selected mortgage types, Ghana’s mortgage market, mortgage affordability and feasibility of the GPM in Ghana.
Importance of Housing Finance
Housing finance plays a critical role in the development process by supporting housing markets, while strengthening the financial sector and contributing to overall economic growth. With strong housing finance markets come many economic and social benefits, such as greater consumer savings, more social and labour mobility, increased investment, support for job creation and general improvement in living conditions (World Bank, 2008). Housing Finance Markets serve as a catalyst for economic productivity by contributing to land and labour markets, building materials, transportations systems, construction, among others (IFC, 2008). Chiquier et al (2004) and Renaud (1999) support the potential of housing finance systems by recognizing that they contribute significantly to job creation, wealth creation and distribution, social cohesion, economic growth, urban development, home ownership and financial returns. The failure to improve housing conditions and markets can impede economic development, contribute to poverty and social isolation, create negative externalities in development, and destabilize the economy (Lea, 2010).
A vibrant housing finance system can provide essential benefits which may come in the form of improved living conditions (higher standard of living), improved infrastructure, increased propensity to save, capital provision for other investment vehicles, among others. Housing finance also contributes to social stability by enabling households to purchase an asset which will represent their largest single investment; because, personal residences account for 75% to 90% of household wealth in emerging economies, which amounts to 3 to 6 times their annual income (IFC, 2008).
Augmenting Housing Finance and Economic Development: Mortgage as the Panacea
Among the housing finance alternatives, mortgage securities are the vehicle to tap capital markets for funds for housing and can improve the accessibility and affordability of housing whiles allowing lenders to better manage the complex risks of housing finance (Renaud, 2005: World Bank, 2008). The mortgage market is a major contributor to development and GDP in many economies because, if the economy grows at a given rate, the housing sector has the capacity to grow at 1.4 times that rate and generate 3.2 million new jobs over a decade (World Bank, 2008). These assertions are grounded in the residential mortgage debt to G.D.P ratios in many developed economies including Netherlands(98%), Denmark(99%), Switzerland(100%), United Kingdom(85.6%), United States of America (72.4), Germany(47.6%), Australia(85%), Canada(62) (IUHF,2013:2014). Conversely, developing countries have their residential mortgage debt to G.D.P ratios as: Kenya (3.7%), Nigeria (<1%), Rwanda (2.6%) and Ghana (0.5%). (CAHF, 2013: 2014).