Mortgages: are banks paying only lip service?

Paul Nkuzi, an engineer loves taking up mortgages. For seven years the managing director of Roma Consults has discovered how to make some money using mortgages.

He has a simple formula. He takes up a bank loan, buys a house and gets a tenant for it. Nkuzi then uses the rent from the same house to service the loan.

So why are thousands of employed people with regular income signing up for home loans and instead continue to spend on houses they would never own?

The reason they fail to take up a mortgage is because “they forget that the money (loan) is not theirs. They want to marry a second wife or stop drinking from their usual Kafunda and shift to Serena,” said Nkuzi.
Nkuzi advises that “anyone with a sober mind should go for mortgages because it is the only way to go.”

On the other hand however, is Mugisha, a barber on Dewinton Road in Kampala. He has heard about mortgage loans available in some banks and the mere possibility of signing up excites him.

As a young entrepreneur, he says, it does not make business sense to spend Shs 200,000 per month on rent when the same amount could buy him a home.

In a good month, his net profit tops Shs 500,000 – just about the minimum income of Shs 560,000 to qualify one for dfcu Bank mortgage.

But Mugisha will not approach the bank because being employed in the informal sector; he is not eligible for the facility.
And even if he was, he is also not sure that he can service his mortgage without a hitch.

Mugisha is not a lone, because thousands of Ugandans, some with relatively higher income and in formal employment are in a similar situation.

For that reason, some financial analysts knowledgeable in this sector have predicted that mortgage products currently offered by some banks may make no impact on the economy unless cheaper loans are available and more planned housing units built.

“What the banks are lending in terms of mortgages is very small. For me, this [mortgage launches] is just hype,” said an economist in one of the financial institutions.

His assessment comes in the wake of massive advertising by some banks to popularise the recently launched mortgage products.
Stanbic Bank, dfcu Bank and Standard Chartered Bank are leading the campaign to popularise mortgages.

Figures seen by The Weekly Observer indeed show that the banks were yet to offer what they are promising. For example, mortgage finance accounts for just 17% of dfcu’s loan book having improved significantly as compared to the previous year by 11% to Shs 42 billion, according to the bank’s 2006 annual report.

In May, Standard Chartered Bank also launched residential mortgage, offering facilities ranging from $12,000 to $ 470,000, repayable within 15 years.

Around the same time, Stanbic Bank also introduced home loans; a move that the bank’s managers said would take centre stage in expanding the bank’s loan book.

It was also hoped that the manner within which banks attempted to out-perform each other in launching their products would also be manifested in real competition for customers and hence a fall in interest rates. It never was.

“We believe there is a need to bring down interest rates for the mortgage market to grow,” our source who works with one of the Banks said.

In a recent report, titled Growth despite constraints, investment advisors African Alliance described as “problematic” current interest rates on mortgages.

Average interest rates on mortgages in Uganda are 16% per annum, quite high compared with Kenya’s 13% on normal loans.
Some bank officials have attributed the high interest rates on mortgages to what they have termed as “challenges” in the market.

“We are like people who are moving in the dark. We do not have a Property Index where we can carry out a stress test to see how to mitigate risks in the market and see which areas have more value than the other,” said Herman Kasekende Standard Chartered Bank General Manager, SME Banking.

The Property Index shows the movement of property prices and the areas that are experiencing fluctuations in value.
He also blamed the “low saving culture” among Ugandans for high interest rate. Because many Ugandans do not save with banks, commercial banks are forced to borrow from the central bank or in dollars from abroad, the cost of which is passed on to the consumers through higher interest rates.

He said that many banks are forced to factor in a higher interest rate to cover up for any risks in either defaulting on the loan or a depreciation of the shilling.

Elizabeth Kabugo, dfcu manager mortgages agrees. “Compared to Europe and America, the interest rates charged on our mortgages are high. This is mainly due to the cost of funds which are cheaper in developed economies than ours.”

And because Uganda’s market is not tested in handling long term credit such as mortgages, it is highly risky to extend the product to many people, Kasekende said.

He said that there is no special court to arbitrate in mortgage disputes market that he said would boost banks’ confidence and lend to more people.

Stringent process

Property developers however, think that banks needed to loosen up and ease the processing of mortgages. Anita Among, General Manager Akright Sustainable Housing Finance agrees. According to Among, banks demand that clients open accounts, present salary pay slips among others to be considered for a mortgage.

“They also want an evaluation report from a qualified company. Not many people can afford that,” she said. An evaluation report from reputable companies costs about 0.5% of the value of the property.
At Housing Finance Company of Uganda, one must be an employee of a corporation or an “organization of a high repute” to be considered for a loan.

Other requirements include the property being a single-family unit located in urban or peri-urban area, a copy of a land title, proof of ownership of the plot with appropriate access, approved building plans and bills of quantities. The site must also be fully serviced with all utilities or available in immediate neighborhood as well as proof of other source of income.

For self employed applicants, the requirements include memorandum and articles of association or any other registration particulars, registration certificate, audited accounts for the last 2 years, a bank statement for the last two years. These requirements point to an up market client.

Banks also require customers to raise 30% of the value of the mortgage before they can access credit. Among said most borrowers cannot afford that.

This is why a leading property developer, Akright Projects launched Akright Sustainable Housing Finance from where people can borrow the 30% required by banks. This is however lent at 15% interest rate that increases the borrower’s indebtedness and scatters it to more than one lender.

Access to cheaper loans would attract more property developers to construct more planned houses, the bank economist said.
At the same time, cheaper loans would result in whole sale mortgage whereby institution investors like banks buy a whole housing estate from a property developer and later sell them to individuals at a cheaper rate.

“This would free up resources for the property developer to go to another site and construct more houses,” said the economist. At the moment, commercial banks are giving out ordinary bank loans that they have named mortgages.

In so doing, banks offer credit for the purchase or completion of houses, no matter the location as long as the documents are in order.
But critics say this creates difficulties in monitoring the economic impact of mortgages because the properties are not tradable. In a vibrant market, mortgage holders are not tied to a single property. They can buy and dispose of incase they needed to acquire a new property or get out of it completely.

There is however some indication of market growth in the local mortgage industry. According to Bank of Uganda’s July economic review, mortgage loans grew by 2% to Shs100.9 billion between April and May.

There is hope the mortgage industry will grow in the near future after government slashed Value Added Tax on residential properties from 18% to 5% in the 2007/8 budget


SOURCE: UG OBSERVER