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Mortgage Basics

Buying a home is serious business, and buying it with a home loan is much much more serious and the process only completed by committed self-motivated prospective homebuyers.

 

WHAT IS A MORTGAGE?

A mortgage is a long-term loan taken out to buy property or land. You repay the loan plus interest over a period of anything up to 30 years (period may be more or less). A mortgage is the biggest, most expensive financial product most people ever take out, so it's important to understand the terms and pick the right mortgage for you. Also, since a mortgage is 'secured' against the property, if you don’t keep up with your mortgage repayments your lender can repossess your home. Get the wrong one and even if you don't lose your property you could end up paying tens of thousands of cedis or dollars more than you need to in interest and fees.

 

DIFFERENT TYPES OF MORTGAGE

Fixed rate

With a fixed rate mortgage, your interest rate is set for a period of time, usually two, three, five or ten years. This means that your monthly payments will always be the same during that period, even if the Bank of Ghana Reference Rate or 182-day T-Bill rate goes up or down. These mortgages are best suited to people who are prepared to pay slightly more for the security of knowing exactly what they'll pay each month.

 

Variable Rate

With a variable rate mortgage, your interest rate can go up or down each month, depending on external factors. There are two main types:

 

Tracker

These have an interest rate that 'tracks' either the Bank of Ghana base rate or your lender's own standard interest rate (SVR). If you choose a mortgage that tracks the base rate, your interest rate, and the amount you repay each month, will change if the Bank of Ghana changes the base rate. For example, a tracker mortgage might be 1% above base rate. If the base rate is 0.5%, you’ll pay 1.5%. So, if the base rate rises to 2%, you’ll pay 2.5%. If your mortgage tracks your lender's standard rate - known as the 'standard variable rate' or SVR - what you pay is based purely on your lender's whim. In general, SVRs go up and down in line with the base rate and the lender is allowed to change the rate whenever it sees fit.

 

Discount

This is a variable rate mortgage that tracks the lender's SVR, but several percentage points lower. For example, the discount might be 1% off the SVR. So if the lender’s SVR is 3%, you’ll pay 2%. A variable rate mortgage may suit you if you want to pay less now and are prepared to risk the chance of your monthly repayments rising if the interest rate you are tracking moves upwards. Read more in our dedicated guides to tracker and discount mortgages.

 

 

OFFSET MORTGAGE

An offset mortgage lets you link your savings account, and sometimes your current account as well, to your mortgage so you only pay interest on the difference. For instance, if you have a mortgage of GHS100,000 and savings of GHS20,000 and GHS1,000 in your current account, you would only pay interest on GHS79,000 of your mortgage if you linked it to these accounts. Offset mortgages are ideal for anyone with a large amount of savings The good thing about offset mortgages is that while you benefit from lower interest charges (as you would if you paid off large chunks of your mortgage), you can also access your savings whenever you like, giving you the best of both worlds.

Offset mortgages can be an ideal option for anyone with a large amount of savings, or self-employed workers who build up money to pay their tax bill each year. If that's you, then an offset mortgage will probably save you more money in unpaid interest on your mortgage than you could earn with a traditional savings account. Find out more with our guide to offset mortgages.

 

BUY-TO-LET MORTGAGES

Buy-to-Let (BTL) mortgages are specifically designed for landlords (or investors) who want to buy a property to rent out to tenants. They are more expensive than ordinary residential mortgages because lenders see rental property as higher risk, but if you are going to rent out a property using a mortgage you have to have a BTL mortgage. BTL mortgages are virtually identical to normal mortgages, for example you can choose between a variable or a fixed-rate interest rate. But, how much you can borrow will depend on the potential rental income of the property rather than your personal income. Also, BTL mortgages generally require a larger deposit than other types of mortgage. Check out our buy-to-let mortgage guide for more information.

 

FIRST-TIME BUYERS

If you've never owned a house before, you are a first-time buyer (FTB). Many lenders offer special deals for FTBs in order to help you onto the property ladder (and turn you into a long-term customer).

 

REMORTGAGING

This is when you take out a new mortgage to pay off an existing one. The most common reason to do this is to save money. For example, you might be on a two-year fixed rate and find your payments go up (normally to the lender’s SVR) after the fixed period ends. At this point you may want to consider remortgaging to get a cheaper rate. Some people also remortgage in order to borrow a larger amount so they can pay off their debts or pay for home improvements.

 

PORTING

This means moving your mortgage from one property to another allowing you to move home without remortgaging. Not all mortgages allow porting, so if it is something you think you may need check the terms and conditions before you take out a mortgage.

 

LOAN-TO-VALUE (LTV)

You'll see this thrown around a lot when you are looking for a mortgage. It means the amount of money the lender is lending you as a percentage of the value of your home. So, if your home is worth GHS200,000 and you've got a GHS40,000 deposit, you need to borrow GHS160,000 or 80% of the value of your home. This means you're LTV is 80%.

 

MORTGAGE FEES - HOW PAYING THEM CAN SAVE YOU MONEY

Whatever type of mortgage you choose, you’re likely to be hit with a large arrangement fee of around GHS5,000 or more. This can be paid upfront, or added onto your mortgage, which means you will pay interest on it for up to 30 years (or maximum mortgage repayment period). You may also have to pay legal, booking and valuation fees. 

 

WHAT YOU NEED TO GET A MORTGAGE

A Deposit

You need to save a deposit to get a mortgage, and the bigger the better. If you save a 10% deposit, your mortgage will be 90% of the property’s value. This is known as the loan-to-value (LTV). In general the lower the LTV, the better the interest rate you’ll be eligible for.

 

A Good Credit History

A lender will check your credit history when you apply for a mortgage. They will want to see how you’ve handled borrowing money in the past and if you pay bills on time. The better your credit history the lower the interest rate you will be offered on your mortgage. Owing Quick Loan or any of the mobile money loans can work to your disadvantage.

 

Proof of Affordability

Mortgage lenders will check if you can afford your mortgage. To do this they look at your income and outgoings. If you’re employed they will want to see your payslips, and if you’re self-employed they'll want to see your accounts for several years. Then they will look at your other financial commitments and decide how much they will lend to you.

 

A Potential Home

Your mortgage lender may well give you a 'mortgage in principle' before you have chosen your dream home. But they won't release the funds until they've carried out a valuation of the property you want to buy. This is so they can make sure it is worth what you intend to pay for it, so they can be sure they'd get their money back if they had to end up repossessing your home.

 

 

REPAYING YOUR MORTGAGE

When you take out a mortgage you’ll agree a 'term' with the mortgage lender. This is how many years it will take to pay it back. 15/20 years is the standard mortgage term but most lenders (like DCANS Mortgage) allow terms of up to 30 years. If you can pay the loan off quicker, you can agree a shorter term. Your mortgage lender will tell you the monthly payments you need to make to repay the mortgage by the end of the term, but you can get an idea of what you'll pay with this calculator.

Mortgage repayments have two parts:

• Capital - This is the money you borrowed.

• Interest - This is your payment to the lender

 

There are two ways you can repay a mortgage:

• Repayment - This means you pay off some of the capital and some of the interest each month. So that, at the end of the term, you’ll own your property outright.

• Interest-only- This means you just pay off the interest each month so your repayments will be smaller. But, the big drawback here is that at the end of the term you’ll still owe the capital you borrowed. For this reason mortgage lenders will insist you have a plan in place – such as an investment – to repay the capital. Interest-only is also more expensive in the long-run as you are paying interest on the full loan for the entire length of the mortgage. In contrast, with a repayment mortgage the amount of interest you are paying slowly falls as you repay the capital.

 

Case study of two loan repayment types

See how the two types of loans affect John and Rebecca's repayments. Kofi and Adwoa have a loan of GHS500,000 and are deciding which repayment option is suitable for them for the 30 yrs loan term. The table shows the difference in interest they will pay over the life of their loan.

 

*
Interest Rate 
Monthly repayments during interest only period
 Monthly principal and interest repayments
Total interest payable
 Additional interest paid due to the interest only period
30 yrs Repayment (Capital + Interest)
 4.39%
 N/A
 GHS2,501
 GHS400,307
 GHS0
Interest-Only (IO) For 5yrs (25 yrs Repayment)
 4.39%
 GHS1,829
 GHS2,748
 GHS434,161
 GHS33,854

 

If you fall behind on your monthly mortgage payments, this is known as “arrears”. If you don’t pay off your arrears when requested by your mortgage lender, it may eventually repossess your home.

 

MORTGAGE TERM VS AMORTIZATION

One of the most common sources of confusion for prospective home buyers is the difference between a mortgage term and amortization period. A mortgage term is the length of your current contract, at the end of which you'll need to renew; The amoritization period is the total life of your mortgage.

 

Mortgage Term: The length of time you are committed to a mortgage rate, lender, and associated mortgage terms and conditions set out by the lender.

Mortgage Amortization: The length of time if takes you to pay off your entire mortgage. Over the course of your amoritization period, you may sign multiple mortgage contracts. Most maximum amortization periods in Ghana are 20 years (but 30 years with us). Longer amortization periods reduce your monthly payments, as you are paying your mortgage off over a greater number of years. However, you will pay more interest over the life of the mortgage.

 

Mortgage Term and Mortgage Amortization periods can be the same.

 

Short vs. long term amortization periods

Many home buyers choose shorter amortization periods resulting in higher monthly payments if they can afford to do so, knowing that it promotes positive saving behaviour and reduces the total interest payable. For example, let us consider a GHS300,000 mortgage, and compare a 25-year versus 30-year amortization period.

 

 
Mortgage Amount
Amortization Period
Interest rate
Monthly payment
Total interest
Scenario A, Shorter Amortization (25 years)
 GHS300,000
 25 years
 5.1%
 GHS1,762
 GHS228,580
Scenario B, Longer Amortization (30 years)
 GHS300,000
 30 years
 5.1%
 GHS1,620
 GHS339,659
Difference (Scenario B-A)
 -
 -
 -
 (GHS142)
 GHS111,079

The mortgage payments under scenario B are smaller each month, but the home owner will make monthly payments for 5 additional years. The total interest saved by going with a shorter amortization period exceeds GHS100,000.

For the savvy investor, these savings should be compared to the opportunity cost of other investments. Using the example above, the monthly savings of GHS142 under scenario B, could be invested elsewhere, and, depending on the rate of return, could come out ahead after 35 years.

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Related Pages

Mortgage Guide

Mortgage Benefits

Homebuying Guide

YOUR HOME (OR COMMERCIAL PROPERTY) MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBTS SECURED ON IT - REPAYMENT ASSISTANCE PROGRAMME AVAILABLE FOR QUALIFIED CUSTOMERS. ALL APPLICATIONS ARE SUBJECT TO STATUS AND OUR LENDING CRITERIA - THIS MEANS THAT THE AMOUNT WE WILL LEND YOU WILL DEPEND ON YOUR INDIVIDUAL CIRCUMSTANCES, THE TYPE OF PROPERTY AND THE AMOUNT YOU BORROW.

We are Non-Deposit Taking No Upfront Fee Direct Lenders (not brokers). Terms, conditions and rules govern our operations, so if you disagree with any of them in part or in whole, please don't use our services. All loanable funds are private patient capital from dedicated sustainable and reliable sources and not sourced funds from the general public. We're Fully-Compliant: Our mortgages are structured as Seller-Financed Mortgages (SFM) and where applicable, as Commercial Mortgages, which do not require Bank of Ghana (BoG) regulation. Legal & Compliance Provided by TLA Firm & Ghanaian Partners. For more details, see Regulation & Compliance.

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