The real estate sector in Ghana has experienced exponential growth over the past few decades, making it one of the most lucrative fields for both local and international investors.

This surge has seen real estate developments spread across the country, with a significant concentration in Accra, the capital city. Despite this growth, the sector has historically been perceived as accessible only to high-income earners, particularly when it comes to purchasing homes through facilities like mortgages.

However, this narrative is gradually shifting, making home ownership more accessible to a broader segment of the population. This article provides an in-depth look at mortgage financing in Ghana, focusing on how interest rates impact home loans, the different types of mortgages available, and strategies for securing the best deals.

Mortgages in Ghana

In the early days of real estate development in Ghana, only a small elite could afford to purchase homes, often without the need for mortgages. These developments were typically located in exclusive areas, reinforcing the notion that owning a real estate property was a privilege reserved for the affluent. For the average Ghanaian, the idea of purchasing a real estate house seemed like an unattainable dream, far removed from reality.

This perception was further compounded by the lack of vital information regarding mortgage facilities, flexible payment terms, and different housing options. As a result, potential homeowners with lower purchasing power were often excluded from the real estate market. Real estate developers and financial institutions have recognized these challenges and have been working to shift the paradigm, creating opportunities for middle-income earners to become homeowners.

What is a Mortgage?

A mortgage is a financial tool that allows a borrower to secure or purchase a house through a loan provided by a financial institution. The property itself serves as collateral, meaning that if the borrower defaults on the loan, the lender has the right to take possession of the property and sell it to recoup its losses. A mortgage typically consists of four main components: principal, interest, taxes, and insurance, with payments usually made on a monthly basis.

Before securing a mortgage, borrowers must agree to certain terms and conditions, including the loan repayment period, which can span several decades, and the amount to be paid as a down payment. These terms are crucial in determining the borrower’s ability to repay the loan and the overall cost of the mortgage.

Understanding Mortgage Interest Rates

Interest rates are a critical factor in determining the cost of a mortgage. In Ghana, mortgage interest rates are influenced by several variables, including the Bank of Ghana’s monetary policy, inflation, and the overall economic environment.

Factors Influencing Interest Rates:

• Central Bank Policy: The Bank of Ghana’s policy rate, which serves as a benchmark for lending rates in the economy, plays a significant role in determining mortgage interest rates. When the policy rate is high, commercial banks pass on the cost to borrowers through higher mortgage rates.
• Inflation: High inflation erodes the value of money over time, leading lenders to charge higher interest rates to compensate for the loss of purchasing power.
• Economic Stability: During periods of economic uncertainty, banks may raise interest rates to mitigate the risk of default, making mortgages more expensive for borrowers.

Types of Mortgages Available in Ghana

There are several mortgage products available in Ghana, each tailored to different needs and financial situations. Understanding the options can help prospective homeowners choose the right mortgage.

Definition:

A Fixed-Rate Mortgage is a type of home loan where the interest rate remains constant throughout the entire term of the loan. This results in predictable, unchanging monthly payments, making it easier for borrowers to budget over the long term.

Pros:

• Payment Stability: Monthly payments remain the same throughout the life of the loan, providing financial predictability.
• Simplicity: Fixed-rate mortgages are straightforward and easy to understand, with no surprises in payment amounts.
• Protection from Rate Increases: Borrowers are protected from rising interest rates, which can be advantageous in a fluctuating market.

Cons:

• Higher Initial Rates: Fixed-rate mortgages typically start with a higher interest rate compared to adjustable-rate mortgages.
• Less Flexibility: Borrowers do not benefit from falling interest rates unless they refinance the mortgage.
• Long-Term Commitment: Fixed-rate mortgages often come with long terms, such as 15 or 30 years, which may not suit all borrowers.

Variable-Rate Mortgage

Definition:

A Variable-Rate Mortgage, also known as a floating or adjustable-rate mortgage outside the U.S., has an interest rate that changes periodically based on a benchmark interest rate or index. This can cause the borrower’s monthly payments to vary over time.

Pros:

• Lower Initial Interest Rates: Variable-rate mortgages often start with a lower interest rate than fixed-rate mortgages, making initial payments more affordable.
• Potential for Lower Payments: If interest rates decrease, the borrower’s payments may also decrease.
• Short-Term Affordability: Can be beneficial for borrowers who plan to sell or refinance before the interest rate adjusts.

Cons:

• Payment Uncertainty: Monthly payments can increase if market interest rates rise, making it harder to budget.
• Complexity: The terms and conditions of variable-rate mortgages can be more complicated than those of fixed-rate mortgages.

Higher Long-Term Costs: Over time, if interest rates rise, a variable-rate mortgage may become more expensive than a fixed-rate mortgage.

Interest-Only Mortgage

Definition:

An Interest-Only Mortgage is a type of home loan where the borrower only pays the interest on the loan for a set period, typically 5 to 10 years. After the interest-only period ends, the borrower must start paying both principal and interest, which can significantly increase monthly payments.

Pros:

• Lower Initial Payments: During the interest-only period, monthly payments are lower, freeing up cash flow for other expenses or investments.
• Flexibility: Suitable for borrowers who anticipate a significant increase in income or expect to sell the property before the principal payments begin.
• Short-Term Financial Relief: Can be beneficial in the short term for borrowers who need temporary financial relief.

Cons:

• Payment Shock: After the interest-only period ends, the monthly payments can increase dramatically as both principal and interest must be paid.
• No Equity Buildup: During the interest-only period, the loan balance does not decrease, so the borrower does not build equity in the property.
• Higher Overall Cost: Over time, interest-only mortgages can be more expensive than traditional mortgages, especially if the borrower is unable to pay down the principal.

Adjustable-Rate Mortgage (ARM)

Definition:

An Adjustable-Rate Mortgage (ARM) is a type of home loan where the interest rate can change periodically, typically in relation to an index that reflects market conditions. The initial interest rate is usually lower than that of a fixed-rate mortgage, but it can increase or decrease over time, leading to fluctuating monthly payments.

Pros:

• Lower Initial Rates: ARMs often start with a lower interest rate than fixed-rate mortgages, making them more affordable in the short term.
• Potential for Lower Payments: If market interest rates decrease, the borrower’s payments may also decrease.
• Short-Term Savings: Ideal for borrowers who plan to sell or refinance before the adjustable period begins.

Cons:

• Payment Uncertainty: Monthly payments can increase significantly if market interest rates rise, making budgeting more challenging.
• Complexity: ARMs are more complicated than fixed-rate mortgages, with terms and conditions that can be confusing for some borrowers.
• Risk of Higher Costs: In the long term, an ARM may end up being more expensive than a fixed-rate mortgage if rates rise consistently.

Balloon Mortgage

Definition:

A Balloon Mortgage is a type of loan where the borrower makes relatively low monthly payments for a

set period, with the remaining balance due as a large, lump-sum payment at the end of the loan term. This mortgage is often used by borrowers who expect to have more income or plan to sell the property before the final payment is due.

Pros:

• Lower Initial Payments: Monthly payments are usually lower during the initial term, which can be advantageous for borrowers with fluctuating incomes.
• Short-Term Financing: Suitable for borrowers who do not plan to hold the mortgage for a long period, such as those expecting a windfall or planning to sell the property.
• Interest Savings: Potentially lower overall interest costs if the loan is paid off before the balloon payment is due.

Cons:

Large Final Payment: The borrower must be prepared to make a substantial payment at the end of the term, which can be financially burdensome.

• Refinancing Risk: If the borrower cannot pay the balloon payment, they may need to refinance, which may not be possible under unfavorable conditions.
• Potential for Financial Strain: If the property value decreases or the borrower’s financial situation changes, they may struggle to make the final payment or sell the property.

Second Mortgage

Definition:

A Second Mortgage, also known as a home equity loan, allows homeowners to borrow against the equity they have built in their property. It is called a “second mortgage” because it is subordinate to the first mortgage, meaning that if the borrower defaults, the first mortgage is paid off before the second.

Pros:

• Access to Cash: Homeowners can access significant amounts of cash for major expenses, such as home improvements, education, or debt consolidation.
• Fixed Interest Rates: Many second mortgages offer fixed interest rates, providing predictable monthly payments.
• Interest Deduction: In some cases, the interest paid on a second mortgage may be tax-deductible.

Cons:

• Risk of Foreclosure: If the borrower defaults on the second mortgage, they risk losing their home, just as with the first mortgage.
• Increased Debt Load: Taking on a second mortgage increases the borrower’s overall debt, which can strain finances.
• Higher Interest Rates: Second mortgages typically come with higher interest rates than first mortgages, reflecting the increased risk to the lender.

Top Mortgage Banks in Ghana

Ghana offers a variety of mortgage options through several reputable banks, each with its own unique products and terms:

1. Republic Bank:

○ Formerly known as HFC Bank, Republic Bank holds a 30% share of the mortgage market in Ghana. Their standard home loan rate is 24% per annum, with an APR of 28.6% as of 2019. The bank also offers a Public Servants’ Housing Loan Scheme with an interest rate of 11.9% and a maximum loan duration of 20 years.

2. Stanbic Bank:

○ Stanbic Bank is one of Ghana’s leading mortgage providers, offering loans with no upper limit on the amount required to purchase a home. Their facility fee is 2%, with repayment terms ranging from 5 to 20 years.

3. Absa:

○ Absa’s mortgage offerings are designed for convenience and ease, providing up to 90% financing for home purchases and 70% for home improvements. They focus on fast and efficient service to help qualified individuals own or improve their homes.

4. Cal Bank:

○ Cal Bank offers mortgages to individuals aged 21 to 55 years, requiring an offer from a real estate developer, income verification, and a credit history check as part of their application process.

5. Fidelity Bank Ghana:

○ Fidelity Bank provides a range of mortgage products, including home finance, home equity, and home improvement loans. Their products are tailored to meet the diverse needs of homeowners, with an APR on Cedi mortgages averaging 30.5% as of 2019.

Mortgage Rates in Ghana: GHC vs. USD

Mortgage rates in Ghana can vary significantly depending on the currency denomination. Loans in major foreign currencies like the USD and British Pound often have lower interest rates compared to those in Ghanaian Cedi. For instance, USD-denominated mortgages in Ghana typically have interest rates between 11% and 12.5%, offering a more attractive option for borrowers who can access these facilities.

General Requirements to Secure a Mortgage in Ghana

While specific requirements may vary between banks, potential homeowners can generally expect to provide the following documents when applying for a mortgage in Ghana:

• A completed and signed mortgage application form.

A form of identification (passport, driver’s license, voter’s ID, etc.).

• Verification of income and employment from the employer.
• Copies of individual tax returns and audited accounts for the last three years.
• An offer from a real estate developer.

The Impact of Interest Rates on Mortgage Affordability

Interest rates significantly affect the affordability of a mortgage. Even a small change in rates can lead to substantial differences in the total amount paid over the life of the loan. For example, on a GHS 500,000 mortgage with a 20-year term, a 1% increase in the interest rate could add tens of thousands of cedis to the total repayment amount.

Calculating Affordability:

• Debt-to-Income Ratio: Lenders typically use the debt-to-income (DTI) ratio to assess a borrower’s ability to afford a mortgage. A high DTI ratio may result in higher interest rates or even loan denial.
• Down Payment: The size of the down payment can also influence the interest rate. Larger down payments often result in lower interest rates and better loan terms.

Strategies for Securing the Best Mortgage Deal

Securing a favorable mortgage deal requires careful planning and negotiation. Here are some strategies to consider:

Shop Around:

• Compare Offers: Different lenders offer different rates and terms, so it’s essential to compare multiple mortgage offers to find the best deal.
• Negotiate: Don’t be afraid to negotiate interest rates and fees with lenders. Even a small reduction in the rate can save thousands of cedis over the life of the loan.

Improve Your Credit Score:

• Creditworthiness: A higher credit score can result in lower interest rates and better mortgage terms. Paying off debts, avoiding late payments, and reducing credit card balances can improve your credit score.
• Pre-Approval: Getting pre-approved for a mortgage not only shows sellers that you’re a serious buyer but can also give you leverage when negotiating rates with lenders.

Consider Refinancing:

• Lower Rates: If interest rates decrease after you’ve secured a mortgage, consider refinancing to take advantage of the lower rates. Refinancing can reduce your monthly payments and the total interest paid over the life of the loan.
• Costs: Be mindful of the costs associated with refinancing, such as closing fees, which can offset the benefits of a lower rate.

Government Initiatives and Support

The Ghanaian government has implemented several initiatives to make mortgages more accessible and affordable for citizens. These include:

National Housing and Mortgage Fund (NHMF):

• Objective: The NHMF aims to provide affordable mortgage financing to low- and middle-income households.
• Benefits: Subsidized interest rates and longer repayment terms make it easier for more Ghanaians to qualify for home loans.

Affordable Housing Schemes:

• Public-Private Partnerships: The government collaborates with private developers to construct affordable housing units, with mortgage financing options available to qualified buyers.
• Subsidies: Some schemes offer subsidies to reduce the cost of homeownership for low-income families.

Navigating the mortgage landscape in Ghana requires a deep understanding of interest rates, loan types, and the factors influencing mortgage affordability. By staying informed and employing strategic approaches, prospective homeowners can secure the best mortgage deals, making the dream of homeownership a reality.

At Pegasus Realty, we are committed to guiding our clients through every step of the home-buying process, from understanding mortgage options to securing the best financing options. Contact us today to learn more about how we can help you finance your dream home in Ghana.