Owning a house is attractive and an investment. You may need to buy one because the precarious housing deficit. But buying a home using mortgages can be so expensive that many either can’t afford or just shy away. But this is changing, though at a snail pace. As of 2013, the cheapest mortgage loan from a bank in Ghana was from International Commercial Bank at 23.04 APR. Cal bank offered the most expensive mortgage loan at 36.26%. More on the Annual Percentage Rate (APR) in a bit. But first, a mortgage is simply a loan in which the property/ house is used as the collateral. As the borrower you’re called the mortgagor, the lender is the mortgagee.

In this post, I will explain the essentials about the cost of borrowing to buy a house and the crucial questions to ask when shopping for a mortgage loan to purchase your new home in Ghana. Housing finance in Ghana is generally expensive, the more reason to search carefully. Although in this post, I focus on borrowing in Ghana, the content here is still useful irrespective of where you want to procure your mortgage

Why Annual Percentage Rates?

Interest rate is the cost of borrowing, the nominal interest rate. This is the rate used in calculating your monthly repayments. For example, if you want to a mortgage loan of 120,000 cedis at 12% interests payable in 20 years, your monthly repayments will be 1,321.00 cedis.

How is that different from APR?

The APR is the interest rate plus any other fees and charges incurred in procuring the loan. These fees include the processing fee, legal fees, insurance, commitment fee, income foregone on mandatory security deposits, broker fees etc. Thus, APR is generally higher than the mortgage’s interest rate. Some refer to these additional fees/charges as the transaction costs of procuring the loan. Stanbic Bank, for example, has a facility fee of 2% of the proposed loan amount. Republic Bank home purchase loans have no facility fee but 1.5% processing fee, 1% of the property price for stamp duty on the title, 0.5% of the loan amount for stamp duty on the mortgage deed.

The APR reflects the true cost of borrowings from banks by the public, and is a linear combination of the Ghana Reference Rate, risk premium and all other charges. (Bank of Ghana, 2019).

Home completion loans from the Republic Bank have a management fee of 2.5% (of the proposed loan amount) for resident Ghanaians. As noticeable, the other charges payable aside the interest on the loan do vary. I leave you to compute how these transaction costs affect the total cost of the mortgage—whether it’s significant or insignificant. Nevertheless, these additional fees are the more reason to carefully examine every offer before you subscribe.

2. Example of Interests vs APR values

The Republic bank mortgage calculator is here. Notice that the transaction costs are not accounted for.

3. Questions to ask when shopping for a mortgage loan

• Other charges/fees

As I have shown above, do not compare the interest rates directly across banks, inquire of any extra fees and charges you must additionally pay.

• Loan to value ratio

This is the maximum amount you can borrow relative to the value of the property you wish to buy. The Ghana Home Loans (now part of First National Bank) offers a 100% mortgage to resident Ghanaians. But typically, one can borrow up to 80% of the value of the real estate (You must deposit the 20% before the loan is advanced).

• Debt to income ratio/loan to income ratio

This is simply a way banks judge whether you can afford the mortgage repayments without financial stress. It’s the sum total of all your existing monthly debts repayments (including your expected monthly mortgage repayments) divided by your monthly gross income and multiplied by 100. A ratio of up to 40% is usually deemed within affordability thresholds. If you exceed the bank’s set point, you won’t qualify for the mortgage.

• Variable and fixed interest rates

The interest rates may either be variable or fixed. Variable interest rates mean that the bank can increase or decrease the interest charged at any time (which may or may not be in your favour). Stanbic bank, for example, offers variable interest rates on GH$, USD, EUR and GBP denominated loans. Fixed interest rate means that the interest rate will remain constant throughout the repayment period. Banks may also offer different mortgage interest rates depending on the currency in which the loan is denominated in.

• Other loan conditions

Some banks such as Stanbic lend for house purchases in Accra and Kumasi and their respective environs only. For Republic Bank, the property must be within a 40-km radius from Accra/Tema, Kumasi, Sekondi/ Takoradi, other regional capitals or an economically viable area approved by the bank. The maximum loan amount for the PSHLs is GHS140,000.00.

Final tips

• Read the fine prints in the contract before you sign your home finance loan.
• Be careful comparing the APRs of fixed and variable loans. Because the interest rate of the adjustable loan can change, the APR does not accurately reflect of the real cost of borrowing (it can be higher if the change is positive).
• Be careful comparing the APR of loans with adjustable interest rates. Each rate can change in any direction and by a different margin and at any time—more reasons to ask questions. These questions are relevant whether your mortgagee (lender) is in Nigeria, Kenya, Tanzania, South Africa or any other country.
• When comparing multiple home loans, the offer with the lowest nominal interest rate is probably the one with the best value.

Additional resources

Bank of Ghana (2019). Annual Percentage Rates Of Banks As At September 30, 2019. https://www.bog.gov.gh/wp-content/uploads/2019/11/APR-of-Banks_September_2019_New.pdf

UN-Habitat (2011). Ghana Housing Profile. Nairobi https://unhabitat.org/sites/default/files/documents/2019-07/ghana_housing_profile.pdf

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