KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI

COLLEGE OF ARCHITECTURE AND PLANNING

DEPARTMENT OF LAND ECONOMY

EXAMINING THE SUITABLE MORTGAGE MODEL(S) FOR DEVELOPING ECONOMIES CASE STUDY, THE GHANA MORTGAGE MARKET

BY WEREKO MENSAH, Clement AGYEI- BEKOE, Jennifer KYERE, Abena Gyameah NARTEY, Narte- Adjoka OBENG, Joseph Kwayisi 3305509 3295309 3302109 3302909 3303309

MAY 2013

KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI COLLEGE OF ARCHITECTURE AND PLANNING DEPARTMENT OF LAND ECONOMY

EXAMINING THE SUITABLE MORTGAGE MODEL(S) FOR DEVELOPING ECONOMIES CASE STUDY, THE GHANA MORTGAGE MARKET

A Dissertation Presented to the Department of Land Economy in Partial Fulfilment of the Requirements for the BSc. (Hons) Degree in Land Economy BY WEREKO MENSAH, Clement AGYEI- BEKOE, Jennifer KYERE, Abena Gyameah NARTEY, Narte- Adjoka OBENG, Joseph Kwayisi 3305509 3295309 3302109 3302909 3303309

MAY 2013

DECLARATION
a) We declare that we have wholly undertaken the study reported herein under supervision.

WEREKO MENSAH, Clement AGYEI- BEKOE, Jennifer KYERE, Abena Gyameah NARTEY, Narte- Adjoka OBENG, Joseph Kwayisi (STUDENTS)

.. . . . .

b)

I declare that I have supervised the student in undertaking the study reported herein and I confirm that the student has my permission to present it for assessment.

.................................... MR JONATHAN ZINZI AYITEY (SUPERVISOR)

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DEDICATION
We dedicate this work first to ALMIGHTY GOD for His grace and blessing and also to our friends and family for their prayers, encouragement and support.

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ACKNOWLEDGMENT
Our sincere gratitude goes to the ALMIGHTY GOD with whose guidance, protection and grace we have been able to attain this level of education. We thank HIM for giving us the strength to undertake this project successfully. We wish to show our gratitude to our supervisor, Mr Jonathan Zinzi Ayitey, who patiently and diligently sacrificed his time to read through this work and offered useful criticisms and suggestions which enabled us complete this research work successfully. We also acknowledge the motivation and good counsel of our academic tutors, Mr James FrimpongAsante, Mr. Eric Tudzi, Dr. John T. Bugri, as well as our much-loved lecturer, Dr. D.N.A. Hammond. We are thankful to all the respondents who helped us in our field survey, with special thanks to Erica Eduam and Richelle Ocansey of Ghana Home Loans and HFC bank respectively, for the interviews granted us. This appreciation will not be complete without saying thank you to our very good friends and colleagues for their assistance, contributions and criticisms; and most of all the teaching assistants, particularly Kugbega Selorm Kobla, and Bismark Aha.

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ABSTRACT
Housing in Ghana is one of the major decisions and the biggest challenge that individuals undertake in their lifetime. Limited by just a few housing finance options that can effectively work in the country, most individuals more often than not rely on incremental housing. This however involves a high initial capital outlay that most prospective home owners cannot afford; thus depriving them of achieving their dreams of home ownership. It is therefore very common to see many families living in rented houses or in conditions that could simply be described as homeless or overcrowded. In light of this, mortgage financing seems to be the most effective and enduring solutions to housing deficit issues in the country. Financial institutions such as HFC, Ghana Home Loans and Fidelity Bank have effectively helped in the mobilization of funds for housing finance through the provision of mortgages to individuals who have the potential of paying back. In spite of this, majority of the populace still cannot afford mortgages according to statistics. This is due to some factors such as low income levels, informal sources of income, high deposit requirements, and extortionate interest rates on mortgages resulting in high repayment to income ratios, high and escalating house prices and some negative cultural perceptions. The study examined the various mortgage models available in Ghana, by examining the mortgage products offered by the three major players in the mortgage market, which are HFC Bank, Ghana Home Loans and Fidelity Bank, and also took into consideration other mortgage models used in some other developing countries. The study further gathered data from 150 public and private sector workers in Accra and Kumasi through interviews and questionnaires to ascertain their level of understanding and major concerns regarding mortgaging as a housing finance option. vi

The study revealed that indeed the various models being employed by the mortgage lenders in the country are not ideal, even for the working class (average Ghanaian income earner), and exhibits characteristics of high interest rates and unfavorable pay back terms. It is therefore proposed inter alia that a different model which is affordable, easily accessible and has a moderate interest being paid by the borrower be developed and employed by the lenders. This model considers initial down payments, absorbing the risk of defaults, and has a flexible pay back regime in order to reduce housing deficit and promote the development of the mortgage market.

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TABLE OF CONTENTS
DECLARATION............................................................................................ iii DEDICATION................................................................................................ iii ACKNOWLEDGMENT ............................................................................... iv ABSTRACT ......................................................................................................v LIST OF TABLES ......................................................................................... xi LIST OF FIGURES ...................................................................................... xii LIST OF ABBREVIATIONS ..................................................................... xiii CHAPTER ONE ..............................................................................................1 INTRODUCTION............................................................................................1 1.1 Background of Study .............................................................................1 1.2 Problem Statement .................................................................................3 1.4 Objectives ................................................................................................7 1.5. Methodology ..........................................................................................7 1.5.1 Sampling Techniques ......................................................................7 1.5.2 Data Analysis....................................................................................8 1.6 Scope of the Study ..................................................................................8 1.7 Limitations ..............................................................................................8 1.8 Organization of the report .....................................................................9 CHAPTER TWO ...........................................................................................10 HOUSING FINANCE AND MORTGAGE TYPES ...................................10 2.0 Introduction ..........................................................................................10 2.1 Housing Finance ...................................................................................10 2.2 The Role of Housing Finance in Economic Development .................11 vii

2.3 Alternative Means of Housing Finance ..............................................13 2.3.1 Equity Approach............................................................................13 2.3.2 Debt Approach ...............................................................................15 2.4 Mortgage as an Economic Development Tool ...................................17 2.5 The Concept of Mortgage ....................................................................19 2.5.1 The General Structure of a Mortgage Contract .........................20 2.6 Mortgage Types and Models (Repayment Options) .........................21 2.6.1 Fixed Rate Mortgages (FRM) .......................................................22 2.6.2 Adjustable Rate Mortgage ............................................................27 2.7 Determinants of Mortgage Instrument Design ..................................35 2.7.1 Supply Consideration of a Mortgage Instrument Design ..........36 2.7.2 Demand Consideration of a Mortgage Instrument Design ........37 2.8 Conclusion .............................................................................................41 CHAPTER THREE .......................................................................................42 AN OVERVIEW OF THE GHANAIAN MORTGAGE MARKET.........42 3.0 Introduction ..............................................................................................42 3.1 Macro-Economic Position Of Ghana .....................................................42 3.2 Housing Finance Systems in Ghana .......................................................44 3.3 Provision of Mortgage in Ghana ............................................................46 3.3.1 Home Finance Company (HFC) ...................................................47 3.3.2 Ghana Home Loans (GHL) ..........................................................48 3.3.3. Fidelity Bank ...............................................................................49 3.4 Mortgage Repayment Models in Ghana ............................................50 3.4.1 Fixed Rate Mortgages (FRM) .......................................................50 3.4.1.2 Constant Payment Mortgage (CPM) ........................................50 viii

3.4.1.2 Standard Conventional Reducing Balance Mortgage (SCRBM) 3.4.1.3 Flexible (Flex) Payment Method ...............................................53 3.5 Mortgage Affordability Analysis ........................................................53 3.5.1 Interest Rates on Mortgages .........................................................53 3.5.2 Income Levels and Security ..........................................................54 3.5.3 Initial Down Payment ....................................................................54 3.5.4 Age Qualification ...........................................................................54 3.6 Conclusion ................................................................................................55 CHAPTER FOUR..........................................................................................56 DATA PRESENTATION AND ANALYSIS ...............................................56 4.0. Introduction .........................................................................................56 4.1 Demand for Mortgage ..........................................................................56 4.1.1 Description of Data Sources..........................................................56 4.1.2 Incomes ...........................................................................................58 4.1.3 Savings and Expenditures .............................................................60 4.1.4 Housing Situation ..........................................................................62 4.1.5 Mortgage as a Mode of Housing Finance ....................................63 4.2 Supplies in the Mortgage Market .......................................................63 4.2.1 Description of Data Sources..........................................................63 4.3 Repayment Method Analysis...............................................................64

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4.3.1 Constant Payment Mortgage Schedule (Fidelity Bank & Ghana Home Loans) ..................................................................................................................64 4.3.2 Standard Conventional Reducing Balance Mortgage (HFC BANK) 66 4.3.3 Flexible (Flex) Payment Method (HFC BANK)..........................67 4.3.4 Equity- Debt Rollover Scheme (Authors Proposed Model) .....68

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4.4 Conclusion .............................................................................................71 CHAPTER FIVE ...........................................................................................73 5.0. Summary of Findings ..........................................................................73

5.1. Recommendations .................................................................................73 5.2. Conclusion .............................................................................................75 REFERENCES...............................................................................................77 APPENDIX A .................................................................................................81 APPENDIX B .................................................................................................84

LIST OF TABLES
TABLE 1 MINIMUM WAGE TREND 2007 -2012 .............................................................................. 44 TABLE 2 CONSTANT PAYMENT SCHEDULE .................................................................................... 51 TABLE 3 STANDARD CONVENTIONAL REDUCING BALANCE MORTGAGE ...................................... 52 TABLE 4 DESCRIPTION OF RESPONDENTS ...................................................................................... 57 TABLE 5 SOURCES OF INCOMES ..................................................................................................... 59 TABLE 6 RESPONDENTS EMPLOYMENT CATEGORY ....................................................................... 59 TABLE 7 MORTGAGE REQUIREMENT OF GHANAIAN FINANCIAL INSTITUTION .............................. 63 TABLE 8 CONSTANT PAYMENT MORTGAGE SCHEDULE (FIDELITY BANK & GHL) ....................... 65 TABLE 9 STANDARD CONVENTIONAL REDUCING BALANCE MORTGAGE (CONSTANT

AMORTIZATION) ..................................................................................................................... 66 TABLE 10 FLEXIBLE PAYMENT MORTGAGE (GRADUATED PAYMENT MORTGAGE) ...................... 67 TABLE 11 EQUITY- DEBT ROLLOVER SCHEME (FIRST SCHEDULE) ................................................ 68 TABLE 12 EQUITY DEBT ROLLOVER SCHEME (SECOND SCHEDULE).............................................. 69

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LIST OF FIGURES
FIGURE 1 INFLATION RATE FROM JANUARY 2000 JANUARY 2012 ............................................. 43 FIGURE 2 GHANAIAN CEDI TO U.S DOLLAR EXCHANGE RATE FROM 2000- 2012 ......................... 43 FIGURE 3 GENERAL INCOME LEVELS OF RESPONDENTS ................................................................ 58 FIGURE 4 COMPARISON BETWEEN EMPLOYMENT CATEGORIES AND INCOME LEVELS .................. 60 FIGURE 5 EXPENDITURE PATTERN ................................................................................................ 61 FIGURE 6 PROPORTION OF INCOME SAVED.................................................................................... 62 FIGURE 7 DISTRIBUTION OF HOUSING TYPES ................................................................................ 62

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LIST OF ABBREVIATIONS
ADB APR ARM BHC BOG CAHF CAM CAP CPM FGBS FRM GDP GHL GPM GREDA HCM HEM HFC HIM HMF HPM IFC IMF Agricultural Development Bank Annual Percentage Rate Adjustable Rate Mortgage Bank for Housing and Construction Bank of Ghana Centre for Affordable Housing Finance in Africa Constant Amortisation Model Capitalisation Rate Constant Payment Model First Ghana Building Society Fixed Rate Mortgage Gross Domestic Product Ghana Home Loans Graduated Payment Mortgage Ghana Real Estate Developers Association Home Completion Mortgage Home Equity Mortgage Home Finance Company Home Improvement Mortgage Housing Micro Finance Home Purchase Mortgage International Finance Corporation International Monetary Fund

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LTV NRCD SHC SIC SMM SSNIT TDC UN

Loan-to-Value Ratio National Redemption Council Decree State Housing Company State Insurance Company Secondary Mortgage Market Social Security and National Insurance Trust Tema Development Corporation United Nations

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CHAPTER ONE INTRODUCTION

1.1 Background of Study Shelter, undoubtedly is one of the most essential necessities of man together with food and clothing. Out of the Physiological (Basic) Needs outlined by Abraham Maslow, housing turns out to be the most tangible and enduring (HFC, 2007). Housing contributes immensely to human life and dignity and therefore, investment in housing should be regarded as an investment in a secure and stabilized future (Karley, 2009). It is an important sub-sector of every economy and a critical factor in tackling poverty, social stability and economic growth. Thus, a social good providing security for families and neighborhoods, societies and communities as well as an economic good which stimulates growth and development. Different people live in different houses; with people renting and some having their own houses. Whatever these differences are, it is important to live in a house that is adequate enough to cater for your living satisfaction. According to The Universal Declaration of Human Rights, access to adequate housing is a vital part of human rights. It does not only fulfill the basic human physical need for shelter but also satisfies social requirements which provides a center for an individual and the basis for family life, emerging as an important symbol of social standing and aspirations. The Declaration further recognizes certain elements as part of housing adequacy that is; affordability, suitability, habitability, tenure security, freedom from crowding, and freedom from discrimination. Unfortunately most developing countries have contravened this provision due to issues with affordability. This therefore emphasizes the need for provision of affordable housing in these countries in fulfillment of the goals of the declaration. 1

Ghana like many African countries faces a major challenge in housing. This is because a fraction of the populace are not able to afford the cheapest newly built house and finance options that might help them overcome their affordability challenges are either not available or insufficient. A common feature of present day society in many developed economies is the purchase of a dwelling house by individuals through mortgage financing provided by either building societies or other lenders. Why same cannot be said with developing countries like Ghana depends on a myriad of factors. According to the HFC annual report 2009, the major constraints affecting the mortgage market in developing countries include; Macroeconomic challenges ( interest rate, inflation, and currency fluctuation), unavailability of long term financing, lack of knowledge of financial product in general ( mortgage in particular) and cultural aversion to debt among other factors. Based on the statement of HFC (2009), the main consideration of a mortgage product is the principal and the mode of repayment. In the repayment of mortgage loans, various models exist which help to schedule the repayment structure of the principal and interests on the loans. In other words, the mortgage model builds a multiline structure that computes the payments associated with a mortgage and assumes payments are monthly, with the interest paid each month on the principal balance. In order to facilitate the affordability and convenience of mortgage financing in the structuring of repayment arrangements, different types of mortgage models exist and are applied by different economies. This is to help achieve one of the several social objective of the institution of mortgage financing, which is affordability and to increase home ownership rate.

1.2 Problem Statement According to statistics only 5% of Ghanaians can afford to build or buy a house from their own incomes; 60% of Ghanaians who want to build will need financial assistance whilst the remaining 35% are not capable of owning a house in their lifetime (HFC, 2007), as urgent as the issue is, it is estimated that Ghana is faced with a housing deficit of over 1 million as of the year 2009 and its currently estimated at 1.7million. It is expected to hit 5.7million by 2020 and to increase at an alarming rate by 2030 (Africa Housing Finance Yearbook, 2012). Aside housing deficit, the standard and quality of houses in Ghana pose a major challenge to the individual and the Government at large. It is also estimated that 70% of the urban population suffer shelter depreciation in terms of decent housing which is below the set up standard for habitation (HFC, 2009) Over the years, there have been some government initiatives which aim at remedying this situation, however all of these initiatives, have tended to be ad- hoc and not products of a comprehensive housing policy and have failed to effectively address the national housing problem in a sustainable way (CAFH, 2012). This can be witnessed by the Affordable Housing Project by the NRC government headed by I.K Acheampong in 1974 and even the current STX construction deal which died at a surfacing stage. Housing development driven by the state, primarily target the public service, have however, been unable to significantly dent the demand of housing. Over the 10-year period 1991 2000, state housing institutions produced less than 40,000 mortgageable units (African Housing Finance, CAHF, 2012). This is woefully inadequate in solving housing deficit which stands at 70,000 100,000 annually (UN Habitat, 2008). There is therefore the need to examine the various housing finance mechanisms in Ghana

and their contributions in reducing housing deficit since the various Government policies on housing are inadequate in this area. Self-finance construction (Incremental Housing) as a housing finance mechanism accounts for about 90% of the new housing developments in Ghana (CAHF, 2012), however, it has been proven to be ineffective in solving the housing problems (Lea, 2009). Because of its nature, huge chunk of capital is sunk into development without any returns for quite a considerable time. This alone coupled with the fact that it is unproductive as it takes a long time (between five to fifteen years) to complete a single dwelling unit, makes it ineffective as a housing finance option. Private sector players including Regimanuel Grey Estates Ltd., NTHC Properties, Trassaco Estates Development, Lakeside Estate Ltd, Devtraco, Salem Investment, Flexcon and Civil Master Company have also not delivered sufficient quantities of housing across income bands. With the growth of the oil and gas industry in Ghana, private sector development of upmarket homes is rampant and almost all selling off-plan; these prices range from upwards of US$300, 000 to more than US$1 million. Property rentals in the middle to upper sector range between US$2, 500 and US$8, 000 a month (CAHF, 2012). This is undoubtedly beyond the total revenue of the average income earner and can therefore not be relied on as a major housing finance tool to respond to housing deficit. Experience from some developed countries has proven that the mortgage market is more effective in addressing housing problems (BoG, 2007). Set against the above statement, it is estimated that between 12% and 15% of Ghanaians comprising mainly, top civil servant and

staff of financial institutions have access to mortgage loans to build. Mortgage debt stands at 0.5 of the countrys annual GDP. Various researchers have blamed the various problems of mortgage housing finance on features including, high interest rate, inflation, currency fluctuation, unavailability of long term financing, and the mortgage model adopted for the Ghanaian economy (CAHF 2012, Asare and Whitehead (2006), HFC (2001)). It could be envisaged from the above that, most of the mortgage constraints aside the mortgage model adopted are macroeconomic in nature and very little can be done to curb its effect. In deciding the mortgage model to use it is necessary to arrive at an equilibrium position favorable to both the lender and the borrower, considering the various risk factors they are exposed to; as well as considering the standpoint of the laws and statutes regarding mortgage financing in Ghana. Regarding the mortgage models employed in the Ghanaian economy, is this aim being achieved? The Ghanaian mortgage market currently has most of its mortgages being indexed to the US Dollar resulting in the fixed rate fixed payment mortgage being the predominant repayment method in the market, since this method caters for the factors (inflation and local currency fluctuations) which would have otherwise called for the use of variable rate mortgages. This however limits the choice of the customer as well as his or her preferred mode of repayment. The price of the cheapest basic unit currently is GH 35,000 (US$17 500) (AHFYB, 2012). Using a dominant fixed rate fixed payment model of interest 30% for the average duration of 15 years, with a given Loan to Value (LTV) ratio of 80% on the average, the individual is supposed

to make a down payment of GH 7,000 ($ 3,500) before a monthly commitment of GH 710 ($ 355) to qualify. With the middle income section of the populace earning monthly incomes of between GH800 and GH 1,200 (approximately $400-$600), it is clear that majority of the Ghanaian populace, 60% of Ghanaians, who will need financial assistance to build cannot qualify for the cheapest mortgage loan to purchase a house approximately GH 35,000 ($17,500). In order to facilitate the affordability and convenience of mortgage and to structure a repayment arrangement, different types of mortgage models exist and are applied by different economies. This is to help achieve the initial aim of the institution of mortgage financing, which is affordability to the borrower but however satisfactory to the financial institution. This study therefore explores the relationship between mortgage models and housing consumption, periodic income, non-housing wealth, the income tax position of the household, expected mobility, legal provisions and other micro-level characteristics that exist within the working class of the society as well as the feasibility and riskiness to the mortgage suppliers. It seeks to clarify the best mortgage model or combination of mortgage options suitable for the Ghanaian economy. 1.3 Research Aim The main aim of this research is to identify various mortgage models in developed mortgage markets, examine the extent of its practicality in the Ghanaian mortgage market taking into direct consideration the Supply and demand side of the market.

1.4 Objectives

1.

To ascertain the nature and state of the Ghanaian Mortgage Market and identify variables that affects both the demand and supply side of the market.

2.

Identify and outline the nature of the various mortgage models and designs in various economies.

3.

To ascertain the accessibility, affordability, feasibility, and riskiness on both the supply and demand side of the market.

4.

Give appropriate recommendations on the best model suitable for both the supply and demand side of the mortgage market in Ghana.

1.5. Methodology Data source used included both Primary and Secondary Data. Primary data were obtained through the use of questionnaires and semi -structured interviews and Secondary data were gathered from books, the internet, periodicals, journals, newspaper publications, published and unpublished works and magazines. 1.5.1 Sampling Techniques The sample technique demanded two sample sets to cover both the demand and supply sides of the market. The demand set emphasized on the proposed borrower (the average income earner). Non probability (purposive) and convenience sampling techniques were adopted for the selection of workers who invariably constituted potential demand for mortgage products. At the supply side data was required from relevant mortgage institutions including Ghana Home Loans,

H.F.C Bank, and Fidelity Bank. The purposive non-probabilistic sampling technique was adopted in the selection of the firms from whom information were needed.

1.5.2 Data Analysis Both qualitative and quantitative data analysis was necessary. Quantitative data analysis and representation tools including line graphs, bar graphs and pie charts were employed. Again, the Statistical Package for Social Sciences (SPSS) analytical tools was used to further analyze data collected and rational statistical inferences shall be there after drawn. The qualitative data were edited, encoded and finally analyzed. 1.6 Scope of the Study The study was limited to the residential mortgage market in Ghana. However both sides of the market were considered. From the demand aspect, data was concentrated on the major urban areas, namely Kumasi and Accra geographically because they are the prime location of middle income earners and effective mortgage transactions. The supply scene focused on the three vibrant mortgage lending institution which is the HFC Bank, Ghana Home Loans and Fidelity Bank. The study also centralized on the Home Purchase Mortgage product for the reason that the subject matter is assumed to be embracing mortgage as a system of housing finance from the scratch, and therefore other mortgage products including; the Home Equity Mortgage, Home Completion Mortgage and Home Improvement may not be the best option for such category of persons. 1.7 Limitations 1. The difficulty of accessing the data in the supply field rendered some quantitative comparative analysis quite superficial and incomplete. 8

2. The use of the purposive non-probabilistic sampling method subjected the study to bias towards particular financial institutions and neighborhoods. Although reliable, the analysis could not capture all participants of the mortgage market. 3. Limited resources in terms of finance and time constraints influenced the sample size selection as well as the analysis of further distant variables that may have broaden the work area. 1.8 Organization of the report The subject matter of this report is presented in five chapters. The first chapter is the introductory section and comprises the problem statement, objectives of the study, scope and organization of the study as well as methodology and limitations encountered. The second chapter reviews and discusses related theories and concepts on housing finance, the nature of mortgages and mortgage repayment models used in parts of the world. The third Chapter narrows on the Ghanaian mortgage market and discusses the various mortgage institutions and mortgage models employed. The fourth section of presents an analysis of the data gathered from the field survey. The concluding chapter is a summary of the findings and observations of the study. A discussion of these findings leads to the generation of relevant recommendations and proposals for further research.

CHAPTER TWO HOUSING FINANCE AND MORTGAGE TYPES

2.0 Introduction
In this chapter theories of past works pertaining to the subject matter were reviewed. This includes discussions on related literature and theories on housing financed by mortgage with particular focus on home purchase mortgages. It further presents a review of the types of mortgage. The chapter particularly emphasizes on the repayment options (models) and as well features a discussion on the variables that determine mortgage demand and supply levels. There is also a review of housing and mortgage finance along with its contributions to the economy. The review of the existing literature is aimed at serving as a guide to this study.

2.1

Housing Finance

Housing is one of the most important basic needs in every society. It may be considered for many households around the world as the largest expense and the most important asset. For all households, it is an important determinant of their quality of life. Financing home ownership has traditionally been characterized by huge capital requirement and long investment horizon. Housing finance systems are consequently set to ensure that funds are made available to producers and purchasers of housing (Chiquier and Lea, 2009) Housing finance is a broad topic, the concept of which can vary across continents, regions and countries, particularly in terms of the areas it covers. For example, what is understood by the term housing finance in a developed country may be very different to what is understood by the term in a developing country. The International Union for Housing Finance, as a multinational networking organization, has no official position on what the best definition of 10

housing finance is. However, there have been numerous attempts to come out with the most suitable definition. According to Chiquier and Lea (2009), housing finance brings together complex and multi-sector issues that are driven by constantly changing local features, such as a countrys legal environment or culture, economic makeup, regulatory environment, or political system. In addition, the concept of housing finance and housing finance systems has been evolving over time. Looking at definitions from the mid-1980s, we see that housing finance was defined primarily in terms of residential mortgage finance. The purpose of a housing finance system is to provide the funds which home-buyers need to purchase their homes. This is a simple objective, and the number of ways in which it can be achieved is limited (Boleat, 1985). Notwithstanding this basic simplicity, in a number of countries, largely as a result of government action, very complicated housing finance systems have been developed. However, the essential feature of any system, that is, the ability to channel the funds of investors to those purchasing their homes, must remain. (National Housing Finance System, 1985) 2.2 The Role of Housing Finance in Economic Development Housing provision may be considered an important measure of social welfare and economic development in any nation. It does not only provide shelter but also has significant impact on the lives of the dwellers in terms of skills enhancement, income generation, increased security, health, self-confidence and human dignity. History reveals that governments of developed

countries at every level have at different times played active roles in housing and economic development in their bid to provide adequate housing which, according to The Universal Declaration of Human Rights, is a vital part of human rights .

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Housing has the ability to be a leading sector for stimulating economic growth and development in a depressed or stagnant economy and raising the standard of living of the people. The effectiveness of housing sector policy and performance go beyond just the housing sector. Indeed, the relationship between the housing sector and the broader economy is directly interrelated. If housing market and housing finance systems fail to supply the kinds of services that are requisite, the entire economy suffers. Housing can be highly labour intensive, thus providing employment for a substantial part of the labour force. It has the potential to stimulate industrial activity through its strong

backward and forward linkages to equipment, building materials and other consumer durables. Housing and housing finance is a veritable source of a continuous stream of income for government and its agencies. Income generated through taxation of the value of housing constructions and services can provide substantial revenues to government with which social welfare and economic development programs are financed. International experience has shown that housing finance plays an important role in improving the housing conditions and markets of a country. An effective housing finance system channels the resources to support housing demand, allowing household to accelerate purchase and construction of facilities. Access to finance can liquefy the wealth of inhabitants which will enable them to upgrade and improve their households. Affordable housing can have a beneficial effect on the quality of housing, housing related infrastructure and the shape of urbanization.

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2.3 Alternative Means of Housing Finance

The purpose of a housing finance system is to provide the funds which home-buyers need to purchase their homes (Boleat, 1985). This is a simple objective, and the number of ways in which it can be achieved is limited yet real estate can be purchased without going to a bank. There are numerous reasons why a person would not want to or cannot obtain a mortgage. Maybe lenders don't see that person as being in ideal financial health because of a foreclosure or bankruptcy in his credit history or maybe the individual has plenty of assets in the bank but cannot show sufficient monthly cash flow to convince a lender that he will be able to make the monthly payments or perhaps the individual is a small business owner with irregular income. Whatever the reason, there are other ways to finance large purchases such as real estate. The alternative means of housing finance can be looked at from two basic approaches. Equity approach and debt approach. A few of the most common options under these approaches are discussed below. 2.3.1 Equity Approach Equity approaches to housing finance generally includes incremental building are employed in economies without well-developed formal housing finance systems, where housing is either selffinanced that is by equity accrued through many years of prior savings or financed directly by borrowing from friends, relatives, small savings and lending clubs and housing cooperatives (Lea, 2009). The basis of incremental housing is that the cost of housing could be reduced by recognizing that poor urban families already build and extend their own dwellings incrementally

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in response to their needs and available resources. Below are examples of various informal approaches of housing finance 2.3.1.1 Borrowing from Your Whole Life Policy A whole life insurance policy is one that accumulates cash value over time as you make your regular premium payments and earn dividends and interest. It's possible to borrow against this cash value, and when you borrow from your own whole life insurance policy, there is no loan qualification process. While such a strategy increases your borrowing potential, it reduces the face value of the policy if not paid back. 2.3.1.2 Option to purchase. A buyer purchases an option for a specified amount of time giving him/her the right to enter into a purchase agreement for the specified real property at a specified price. The seller may not market the property to another buyer during the time period specified by the option contract. If the option holder does not exercise the option by the specified time, the option seller keeps the option money and is again free to market the property to another buyer. 2.3.1.3 Lease with Option to Buy (Lease Option). This is a situation where there is an alternative financing option that combines a lease for a period of time with a purchase agreement where the tenant (lessee) has the option to purchase the real property at a fixed price at a specified future point in time. Each month's rent payment typically consists of principal, interest, taxes and insurance payments as though a conventional mortgage were in place. Often there is included an extra amount that is earmarked for deposit to a savings account in which money for a down payment is made.

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2.3.2 Debt Approach This approach allows the purchaser to occupy the property (directly or indirectly) before making payment towards the cost of the property. Payments typically consist of principal and interest for a specified number of years. A customary debt approach to housing finance is mortgage. 2.3.2.1 Land Contract This type of housing finance is usually practiced in states such as Ohio. It is an instalment contract between the seller, known as the Vendor, and a buyer, known as the Vendee, to convey real property. The contract is not required to be fully performed within one year and the Vendee pays for the property in instalment payments, usually monthly. The Vendor retains title as security. Land Instalment Contracts carry an absolute contractual obligation to purchase the real property upon terms which are clearly stated in the contract. The terms also include an outline of the monthly payment instalments which build the Vendee's equity in the property, the same as an ordinary homeowner with a conventional mortgage. Duties to make repairs and keep premises in fit and habitable condition may be shifted to Vendee according the terms of the written contract. In the case of Vendee's default, the Vendor may terminate the Vendee's interest in the real property. 2.3.2.2 Mortgage as a Debt Approach of Housing Finance Financial institutions also contribute to closing the gap between demand and supply for housing. They achieve this buy providing loan to their customers which is secured by real property. In its original conception, a mortgage is essentially a security for the payment of a debt or the discharge of an obligation for which it is given. It is debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with

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a predetermined set of payments. Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front. A mortgage may quite simply be understood as a loan secured by real property. It occurs when an owner of realty pledges his interest as security or collateral for the due payment of a loan (both principal and interest). In Ghanaian jurisprudence, a mortgage is defined as a contract charging an immovable property as security for the due repayment of debt and any interest accruing thereon, or for the performance of some other obligation for which it is given, in accordance with the terms of the contract (NRCD 96, section 1). A mortgage is therefore a contract between two parties which is recognized and enforceable by law. A home buyer or builder can obtain a loan either to purchase or secure against the property from a financial institution, such as a bank or credit union, either directly or indirectly through intermediaries. Mortgage and home loan are often used interchangeably. However, the mortgage is really the agreement that makes your home loan work. The bank wouldn't lend you hundreds of thousands of dollars unless they knew they could claim your home in the event of your default. The development of finance capital markets and their related housing finance systems have become increasingly significant in developing countries, judging by the fact that until recently the demand for housing finance was effectively low. It is seen as necessary for these developing countries to achieve modernization and higher development. As noted above, demand for housing finance is extremely limited by the low levels of affordability and eligibility for bank credit. 16

High inflation, very high interest rates and the inability to secure financing at a term beyond a year were major constraints on the growth of housing finance. With the slowdown in inflation, improvement in exchange rates, drops in bank lending rates and increasing availability of longer-term financing, a more viable market for housing finance is now developing, integrally linked with the housing developments underway(Access to Housing Finance in Africa,2007). The economic environment should be stable. If inflation is volatile, the lender would incur substantial interest rate risk if it lends at a fixed rate. In an unstable environment, lenders will typically pass on this risk to the borrowers, who are less likely to fully understand it, by only offering floating rate loans. Substantial interest rate risk, no matter who bears it, will retard the development of the housing finance system, as either lender will go out of business or borrowers will be unable to repay their loans or both. A typical example is the U.S. savings and loans in the 1980s

2.4 Mortgage as an Economic Development Tool

Housing real estate performs a special role in the economy. Mortgage finance, has been seen as a very important housing finance tool. Nonetheless, its contribution to economic development cannot be over emphasized. With strong mortgage 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 is not neutral to economic development. International experience in high income economies shows that a well-functioning mortgage market will provide very large external benefits to the national economy: efficient real estate development, construction sector

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employment, easier labour mobility, capital market development, more efficient resources allocation, and lower macroeconomic volatility (Renaud, 2004). The current volume of residential mortgage lending in advanced economies such as in the United Kingdom or Spain is impressive and there is every indication that there remains scope for further growth. In the transition countries, current volumes are lower but the rate of growth is faster and the potential for future growth is correspondingly greater (European Bank for Reconstruction and Development, 2008). Particular countries have a different economic situation, depending for example, on the speed of GDP changes, its size per capita, reflecting the purchasing power parity, and availability of capital for financing investment. The last factor, which can be expressed as the volume of mortgage debt in relation to GDP and inflation and the level of interest rates on mortgage loans, is of primary importance for the changes taking place in housing markets (Gostkowska Drzewicka, 2011). These assertions are grounded in the contribution of residential mortgage debt to G.D.P 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) (World Bank 2008, quoted by Lea, 2009) Conversely, some other developing countries have their residential mortgage debt to G.D.P ratios as: Mexico (19%), Thailand (15%), China (10%), Hong Kong (44%). (Bank Indonesia, 2008) Kenya (3.3%), Namibia (32%), Nigeria (0.9%), Rwanda (2.6%), Ghana (0.25%), South Africa (31.7%) (World Bank 2010 as quoted by Centre for Affordable Housing Finance in Africa, 2010)

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A well-functioning housing finance system contributes to the expansion of home ownership with key externalities for growth, job creation, neighbourhood development, fiscal returns and social and political stability (Chiquier and Lea, 2009). It enables households to purchase an asset, which will represent their largest single investment. Home owners as well as the overall economy could be enriched, thereby complementing governments efforts to reduce poverty.

2.5 The Concept of Mortgage

The theory of mortgage is defined as a debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front. (Investopedia, 2013) In a residential mortgage, a home buyer pledges his or her house to the bank. The bank has a claim on the house should the home buyer default on paying the mortgage. In the case of a foreclosure, the bank may evict the home's tenants and sell the house, using the income from the sale to clear the mortgage debt. The traditional mortgage is of the repayment type, where the capital and interest are repaid by regular, fixed payments (but are usually subject to changes in interest rates) over a period of, for example, 20 or 25 years. During the early years of the mortgage, the capital amount owed on the mortgage decreases relatively slowly as the bulk of the monthly payment consists of interest. The closer one gets to the end of the mortgage period, the greater the reduction of the capital amount to be repaid.

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The main alternative to a repayment mortgage is an endowment mortgage. Under this, the monthly payments cover only interest but the mortgager also takes out an endowment assurance that runs parallel to the mortgage and is designed to produce a sum sufficient to repay the capital sum at the end of the mortgage term. It usually does, and it may produce even more than the capital outstanding; however, there is no guarantee that it will. 2.5.1 The General Structure of a Mortgage Contract As set out by Chambers et al (2008) a mortgage loan requires a down payment equal to percent of the value of the house. The amount ph represents the amount of equity in the house at the time of purchase, and D0 = (1 ) ph represents the initial amount of the loan. In a particular period, denoted by n, the borrower faces a payment amount mn (i.e., monthly or yearly payment) that depends on the size of the original loan, D0, the length of the mortgage, N, and the mortgage interest rate, rm. This payment can be subdivided into an amortization (or principal) component, An, which is determined by the amortization schedule, and an interest component, In, which depends on the payment schedule. That is, (1) mn = An + In

Where the interest payments are calculated by In= rmDn. An expression that determines how the remaining debt, Dn, changes over time can be written as (2) Dn+1 = Dn - An

This formula shows that the level of outstanding debt at the start of period n is reduced by the amount of any principal payment. A principal payment increases the level of equity in the home. If the amount of equity in a home at the start of period n is defined as Hn, a payment of principal equal to An increases equity in the house available in the next period to Hn+1. Formally, 20

(3)

Hn+1 = Hn + An

Where H0 = ph denotes the home equity in the initial period. This representation of mortgage contracts is very general and summarizes many of the different contracts available in the financial markets. For example, this formulation can accommodate a no-down-payment loan by setting = 0 so that the initial loan is equal to D0 = ph. Because this framework can be used to characterize differences in the amortization terms and payment schedules, we use it to describe the characteristics of some prominent types of mortgage loans. (ibid)

2.6 Mortgage Types and Models (Repayment Options)

The financial market place offers many types of mortgage loans, which are differentiated by three characteristics: the payment structure, the amortization schedule, and the term (duration) of the mortgage loan. The payment structure defines the amount and frequency of mortgage payments. The amortization schedule determines the amount of principal payments over the life of the mortgage. This schedule differs across types of mortgage loans and can be increasing, decreasing, or constant. Some contracts allow for no amortization of principal and full repayment of principal at a future, specified date. Other contracts allow negative amortization, usually in the initial years of the loan. The term or duration usually refers to the maximum length of time allotted to repay the mortgage loan. The most common mortgage con-tracts are for 15 and 30 years. The combination of these three factors allows a large variety of distinct mortgage products. (Chamber et al, 2008) The various mortgage types are the classifications of mortgages into models, usually based on payment options and arrangements, frequency of payments, interest rate computations, 21

and its affordability. Mortgage type may generally be considered by their rate, thus Fixed Rate Mortgage (FRM) and Variable/ Adjustable Rate Mortgage (ARM) or a blend of the two. Various mortgage models can be categorized under these types. Below are the most used and appreciated mortgage types and its various subdivisions which constitute the models. 2.6.1 Fixed Rate Mortgages (FRM) A Fixed-rate mortgage (FRM) is a mortgage type in which the interest rate is constant and does not change during the term (life time) of the mortgage. This mortgage type has been the primary instrument for home financing in the USA since 1930 (Weintraub, 2011). The nature of this mortgage type allows for loan and interest amortization to be made in equal periodic instalments after such payments have been computed based on an agreed contractual rate which cannot be varied until the contract is abrogated or re-negotiated. The interest rate is fixed at the time of origination. It requires regular payments during the life of the loan, of sufficient size and number to pay all interest due on the loan, and reduce the amount owed to zero by the e nd of the loans maturity date (Jacobus, 2006). These equal periodic instalments are usually made for a fixed period and any fluctuations in the interest rates in the economy are not considered. In summary, the fixed rate mortgage type is characterized by a fixed contract rate and a fixed periodic payment schedule over a fixed loan term. In repaying a fixed rate mortgage, there are two main models. These are the Constant Payment Model (CPM) and the Constant Amortization Model (CAM), with others including the Graduated payment model and the Canadian roll over.

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2.6.1.2.1 Constant Payment Mortgage The Constant Payment Mortgage (CPM) requires equal periodic payments throughout the life of the loan. A portion of this sum goes to pay the interest on the loan and the remaining portion also goes to repay the principal. Although the payment amount is constant over the life of the loan, the portion going to interest decreases with each payment as the outstanding balance falls (see Table 1). Conversely, the portion that goes to the payment of principal also increases at an increasing rate over the life of the loan until the loan is completely repaid. A typical constant payment mortgage of $250,000 loan for 30 years, with an interest rate at 6% and a down payment of 20% is computed below. Characteristics of a Constant Payment Mortgage at 6 Percent* Payment 1 2 120 181 240 251 360 Total Total payment ($) 1,178.74 1,178.74 1,178.74 1,178.74 1,178.74 1,178.74 1,178.74 424,346.40 Interest ($) 973.51 972.51 812.98 686.89 523.73 487.89 5.71 224,346.40 Principal ($) principal ($) (remaining) 205.23 206.23 365.76 491.85 655.01 690.95 1,173.03 200,000.00 199,794.77 199,588.54 166,655.59 140,625.26 106,940.84 99,521.83 0.00 .

Source: Chambers et al, 2008

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2.6.1.2.2 Constant Amortisation Mortgage Under Constant Amortisation Mortgage (CAM) however, the periodic payments vary. It requires that, there is equal periodic payment of principal throughout the term of the loan as well as payment of interest at a fixed rate on the outstanding balance. There is therefore a diminishing monthly payment, a fixed portion of which goes to repay the principal whereas the portion going to pay the interest reduces over time as the outstanding loan balance reduces (see Table 2). Since the CAM ensures higher payments of principal at the early stages of the loan than the CPM, the total interest paid under CAM is lower than that of the CPM. A typical constant amortisation mortgage of $250,000 loan for 30 years, with an interest rate at 6% and a down payment of 20% is computed below. Characteristics of a Constant Amortization Mortgage at 6 Percent* Period 1 2 120 156 181 240 360 Total Total payment ($) 1,529.07 1,526.36 1,207.27 1,109.92 1,042.31 882.76 558.26 375,718.58 Interest ($) 973.51 970.81 651.71 554.36 486.76 327.21 2.70 175,718.58 Principal ($) Principal ($) (remaining) 555.56 555.56 555.56 1 555.56 555.56 555.56 555.56 200,000.00 199,444.44 198,888.89 133,333.33 113,333.33 99,444.44 66,666.67 0.00 .

Source: Chambers et al, 2008

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2.6.1.2.3 Canadian Rollover Mortgage This is a variation of the fixed rate mortgage type. It consists of a series of 5 years standard fixed rate fixed payment mortgage that make provision for a renegotiation or recasting phase after every 5 year period. A shorter fixed-rate period reduces the risk for the lender and will result in relatively lower mortgage rates. A key characteristic of this model is the ability of lenders to charge prepayment penalties during the fixed-rate period. Klyuev (2008) concluded that the Canadian market for housing finance is highly advanced and sophisticated, but financing options were somewhat limited, particularly at terms longer than five years. 2.6.1.2.4 Graduated Payment / Deferred Instalment Mortgage Graduated Payment Mortgage (GPM) loan is a mortgage loan type where the scheduled repayments begin at a level lower than that of a comparable standard mortgage and rises to a point determined by the agreements made in the loan documents, with the period of the rise, the rate of increase, and the interest rate being fixed and also captured in the loan documents. This mortgage type assumes that the borrower will be better-off or his income will increase with inflation in the latter years of the mortgage term (Werwath, 2007). Hence, this loan is given with the anticipation of future higher income streams for the borrower. The justification for the low initial payment during the differential period (initial years) is a larger payment later on after income levels have increased considerably. Graduated payment mortgages have clearly been effective in increasing access to homeownership for wealth-constrained households by shifting the burden of the mortgage to later years (Cohn and Fischer, 1998). The rate of graduation and the frequency of graduation are normally agreed upon by the parties to the loan arrangement such that the higher the rate of graduation, the lower the initial

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payment. Indeed, if the graduation rate is set equal to the inflation rate, and if housing appreciates with the general price level, then the effective loan-to-value ratio on a GPM will have the same time path as would a standard mortgage contract in a period of no inflation (Jaffee, 1992). Conversely however, if the graduation rate turns out to be less than the average rate of inflation, then the real payments will exhibit a declining trend over time (Cohn and Fischer, 1998). A typical graduated payment mortgage of $250,000 loan for 30 years, with an interest rate at 6% and a down payment of 20% is computed below. Characteristics of a Graduated-Payment Mortgage: 1% Geometric Growth Rate* interest 6% Payment 1 2 120 181 220 240 344 360 Total Total payment ($) 195.18 197.13 637.79 1,170.26 1,725.11 2,104.96 5,924.70 6,947.18 682,149.10 Interest ($) 973.51 977.30 1,459.98 1,666.83 1,719.49 1,701.52 508.34 33.65 482,149.10 Principal ($) principal ($) (remaining) 778.33 780.17 822.19 496.57 5.57 403.44 5,416.36 6,913.53 200,000.00 200,778.33 201,558.50 300,763.84 342,933.91 353,260.70 349,161.20 99,017.59 0.00 .

Source: Chambers et al, 2008

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2.6.2 Adjustable Rate Mortgage The Adjustable or Variable rate mortgage is regulated by the adjustment of the interest rate or payment. The interest rate changes periodically, either in relation to an index; and payments may increase or decrease accordingly. In its use, there is the need to consider the maximum amount the monthly payment could increase to. Most importantly, there is the need to know what might happen to the monthly mortgage payment in relation to the ability to afford higher payments in the future. (Consumer Handbook on Adjustable-Rate Mortgages, 2007) Lenders generally charge lower initial interest rates for adjustable-rate mortgages, making it easier on the consumers budget, than it would a fixed-rate mortgage for the same loan amount. In a case where the interest rates remain steady or move lower, for instance, a variable rate mortgage could be less expensive over a long period than an FRM. The risk that an increase in interest rates would lead to higher monthly payments in the future should however be considered. The initial rate and payment amount on an ARM is stagnant for a short period; say 1 month to 5 years or more and this can largely vary from the later rates and payments of the remaining loan term. In cases of stable interest rates however, changes could also affect rates and payments greatly. Most variable rate mortgages have their interest rates and monthly payments changing monthly, quarterly or yearly. The adjustment period is the period between interest rate changes and could be 3 years, or 5 years. The interest rate on an ARM is made up of two parts: the index and the margin. The index measures the general interest rates, and the margin is an extra amount that the lender adds. Payments are affected by any limits on increases or decreases in rates. An increase in the index rate results in a subsequent increase in the interest rate in most circumstances and thus higher

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monthly payments. Also, a decrease in the index rate creates a subsequent decrease in monthly payments. The rates are based on a variety of indexes depending on the economy of the country, changing in line with the macro-economic trends. However, some lenders may use their own cost of funds as an index, rather than use other indexes. In setting the interest rate on an ARM, lenders may add a few percentage points to the index rate, which is the margin and this amount may be based on your credit record as such a better credit will produce a lower margin on your mortgage, and vice versa (ibid). Thus the margin remains the same throughout the life of the mortgage. Interest rates for ARMs can be adjusted from time to time after the loan is advanced, in line with the changes in a benchmark interest rate (Werwath, 2007). An interest rate cap limits the amount to which an interest rate can increase and this is in two segments: periodic adjustment cap, which limits the amount the interest rate can adjust up or down from one adjustment period to the next after the first adjustment; and a lifetime cap, which limits the interest-rate increase over the life of the loan, and this is compulsory. In addition to interest-rate caps, there is a limit to the amount to which your monthly payment may increase at the time of each adjustment and this is known as payment cap. Types of Adjustable Rate Mortgages (ARMs) 2.6.2.1 Interest-Only (I-O) ARMs This mortgage allows for the payment of interest for only a specified number of years; typically 3 to 10 years. This allows for the payments of smaller monthly sums for a period, after which the monthly payments will increase, even if interest rates remain the same. This is because the principal and the interest must be paid back each month and the interest period may adjust during the loan period.

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2.6.2.2 Indexed Mortgages These are mortgage types designed for high and volatile inflation environments. This type attempts to reduce the impact of inflation on nominal interest rates to make loans initially more affordable (Chiquier and Lea, 2009). Essentially, they have their interest rates and loan repayment structures adjusted according to a set index (Kugbega, 2012). These include: a) Dual Index Mortgage (DIM) The DIM attempts to address the affordability problem by indexing the payments to wages but allowing the accrual rate on the loan to vary with inflation or a nominal interest rate. Once again, the basic mortgage design dilemma arises in an attempt to maintain affordability for the borrower over time, a new problem is created: if the wage and rate indices diverge for a period of time the loan may not amortize (Chiquier and Lea, 2009). DIMs create asset-liability management problems for borrowers and lenders. They can experience large negative amortization, which can result in negative equity and greater default risk if house prices are not rising as fast as the balance on the loan. Additionally, DIMs may have extended durations (the term can lengthen to accommodate the negative amortization, but typically up to a limit), potentially creating a positive remaining balance at final maturity (Ibid). b) Price Level Adjusted Mortgage (PLAM) With this variant of Indexed Mortgages, the rate is set at the beginning of the contract and fixed for the life of the loan, and principal balance and payment are adjusted periodically for changes in a price index. The PLAM contract, mainly developed in Brazil, Mexico, Israel, and Colombia, was designed to keep mortgage payments constant over the life of the mortgage by basing the initial payment on a real interest rate and then increasing the nominal mortgage payment each year by the rate of inflation (Erol and Patel, 2007). PLAMS have been criticized as hopelessly 29

complex and unacceptable to borrowers, savers, and financial institutions but the converse is evidenced by the Brazilian experience (Anderson and Lessard, 2007). Payments on PLAMs retain their real purchasing power throughout the term of the mortgage. PLAM advocates base their case on the conviction that real incomes and real house values if not completely certain are at least far more predictable than their nominal counterparts (McClough, 1986). c) Wage Indexed Payment Mortgage (WIPM) Emlak Bank, in Turkey originated WIPMs in 1998 that are based on one unique index, civil servants wage (CSW) index. The WIPM has a ten-year mortgage term with an initial maximum loan-to-value ratio of 75%. Mortgage repayments are indexed to a measure of income in order to maintain the affordability of the loan to the household income (Erol and Patel, 2007). WIPMs, by being balance-indexed mortgages, differ significantly from the US adjustable rate mortgages by having no contracted mortgage rate. This mortgage instrument also has no periodic or lifetime caps that constrain the payment adjustments and no pre-specified margin to be added to the current value of the CSW index (ibid). 2.6.2.3 Equity Premised Mortgages These are the mortgage types that allow the lender to borrow against the equity he has in a property or allow the lender to have an equity share in a mortgaged property. Some of the variants of equity related mortgages include; a) The Reverse Annuity Mortgage This is usually targeted at aging populations. These loans allow homeowners to consume some or all of their housing equity to support their retirement income needs. The borrower can take a lifetime annuity, term annuity, or lump-sum payment at funding and the lender gets a portion of

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the property value (or appreciation) upon sale or death (Chiquier and Lea, 2009). The amount of the payment depends on the equity in the home and whether the payments are for a fixed term or for the life of the borrower. In the United States, the borrower can remain in the home until they die, and the loans are insured by the government mortgage insurer (FHA, 1997). Such loans are likely to gain in popularity as the population ages (ibid). Therefore, persons who are eligible for this mortgage type should be people beyond retirement age, 62 in USA. This is in line with providing colossal sums for retired persons to help improve their livelihoods. The older the borrower is, the larger the percentage of the homes value that can be borrowed (Cook, 1994). b)The Shared Appreciation Mortgage (SAM) The shared appreciation mortgage, used in the United Kingdom allows households to receive a cash payment in exchange for giving up a percentage of potential house price appreciation (in the future). The lenders share of appreciation in these SAMs is essentially a dynamic prepayment penalty imposed on the borrower. However, the borrower faces a moral hazard due to the ability to affect the penalty by reducing maintenance (Sanders, 2005). 2.6.2.4 Integrated Mortgages These are mortgage types that are linked to current accounts, savings accounts, insurance policies, among others as part of their loan repayment plans. a) Endowment Mortgage The dominant instrument in the U.K. through the mid-1990s was the endowment mortgage. It is a mortgage loan arranged on an interest-only basis. Here, the debtors intention is to repay with the proceeds of a life insurance policy on which he/she pays premiums throughout the life of the 31

loan. The customer pays only the interest on the capital borrowed thus saving money with respect to an ordinary repayment loan. The borrower instead makes payment to an endowment policy. The objective is that the investment made through the endowment policy will be sufficient to repay the mortgage at the end of the term and possibly create a cash surplus. The underlying premise with endowment policies being used to repay a mortgage is that the rate of growth of the investment will exceed the rate of interest charged on the loan. Many borrowers were lured into endowment mortgages by promises of high returns on invested premiums. b) Offset or Current Account Mortgage This specific type is a flexible mortgage and it is common in the UK. It involves blending a traditional mortgage with one or more deposit accounts. Here, the borrower is allowed to control mortgage borrowing through a current account with salaries being deposited into the current account periodically thereby lowering the balance outstanding by the salary amount. Its main advantage lies in the interest accruing on the current account also working towards the amortization of the mortgage loan debt. An offset mortgage allows the borrower to keep balances on mortgage, savings and current account in separate accounts but all balances are offset against each other, allowing the possibility of reducing the interest paid and the mortgage being repaid early (en.wikipedia.com, 2013). This is a very attractive option for people that can be diligent savers even though the account will not earn interest. 2.6.2.5 Other Mortgage Types a) Balloon Mortgage It is a mortgage loan which is amortized for a longer period than the term of the loan. Although the mortgage term may be long, the borrower agrees with lender to make periodic payments for

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the first few years and outstanding balance paid at the end of the term. At the end of the term of the loan, the remaining outstanding principal on the loan is amortized by a lump sum payment called the balloon payment. b) Hybrid ARMs These are loans in mixed form; that is fixed-rate period and an adjustable-rate period. The interest rate is fixed for the first few years of the loan, after which the rate may be adjusted annually until the loan is paid off. c) Payment-Option ARMs This mortgage option creates a choice among several monthly payment options. These include; the traditional payment of principal and interest, which reduces the amount you owe on your mortgage and are based on a set loan term; an interest-only payment, which pays the interest but does not reduce the amount you owe on your mortgage as you make your payments; and a minimum (or limited) payment that may be less than the amount of interest due that month and may not reduce the amount you owe on your mortgage. In the case of the minimum (or limited) payment, the unpaid interest is added to the principal of the loan, increasing the amount owed and future monthly payments; as well as the amount of interest paid over the life of the loan. If in last few years of the loan only the minimum payment is paid, a larger payment may be owed at the end of the loan term, called a balloon payment. This type of ARM has the interest rate being low for the first few months, after which it increases gradually to a rate closer to that of other mortgage loans and this may not reduce the amount owed and may not cover the interest due. The unpaid interest is however added to the amount owing on the mortgage, and the loan balance increases; known as negative amortization. High interest rates could thus result in increased payments. 33

Payment-option ARMs have a built-in recalculation period, usually every 5 years, where payments are recalculated or recast, based on the remaining term of the loan. At each recalculation, new minimum payment is a fully amortizing payment and any payment cap will not apply and hence, monthly payments can only increase a lot at each recast. d) Convertible Mortgage Loans Convertible mortgage loans can either be fixed or variable such that after the end of a short term fixed-rate period, the borrower reserves the sole option to select another fixed-rate for the next short term period or switch to a variable rate. It is left predominantly at the borrowers discretion to go for either fixed or variable rate for an agreed period (usually 5 years). About half of Japanese loans are convertible (Standard and Poors 2009) Generally, ARM is largely preferred due to its ability to decrease the interest rate risk for the lender while shifting it to the borrower depending on the adjustment speed (Edwards, 1978). It could be less expensive over a long period, especially in cases where interest rates remain low and steady; or expensive where interest rates fluctuate and increase uncontrollably. They may also reduce borrower risk because they have caps which limit future rate adjustments. This is because higher mortgage rates raise the probability of opting for ARMs, since they allow for a lower payment to income ratio, as compared to fixed rate mortgages (Philips and VanderHoff, 1992). The borrower could be faced with a lower initial rate, translating into lower initial payments in exchange for the taking up of higher risk in future (ibid). Hence, it reaffirms the assessment that tags higher income and wealth households as being more inclined to choose fixed rate mortgages due to risk aversion (Alm and Follain, 1986).

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ARMs serve as a hedge against inflation by employing changing mortgage rates, amortisation payments, as well as varying payment periods. Some ARM interest increases can be so high that the home owner cannot make the payment and may have to go into foreclosure, losing the home and the equity that has been built up in the home (Kenny, 2010). Adjustable rate mortgages are therefore seen to have the ability to influence mortgage choice because they relax payment to income constraints by lowering initial payments, and hence, debunk the views held by Cohn and Fisher (1975) and Kaplan and Hertzog (1977) that increasing interest rates discourages the use of mortgages by first time home buyers.

2.7

Determinants of Mortgage Instrument Design

Determinants of a mortgage instrument design are forensic in nature, as it depends on whether viewed from the borrowers or the lender/investors perspective. Features attractive to borrowers may be costly or impossible for lenders to provide. Features attractive to lenders may not be acceptable to borrowers. A borrower is interested in the affordability of the loan, both at inception and over its life. The lender is interested in getting an acceptable risk-adjusted rate of return over the life of the loan. This presents a conundrum often an attempt to improve the attractiveness of the loan for one party creates a problem for the other. For example, an interest rate cap on an ARM reduces potential payment shock and default risk for borrowers but can reduce yield for lenders (Lea, 2009)

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2.7.1 Supply Consideration of a Mortgage Instrument Design 2.7.1.1 Availability / Sources of funding Funding availability and characteristics are also major factors in the dominance of short- to medium-term fixed-rate mortgages in many countries. The bank can swap its short-term deposits for medium maturity fixed- rate liabilities. The price of mortgage funds is generally understood as how much it cost to borrow. According to Brigham (1982), the price of loanable funds is its interest rate. Sirmans, (1985) confirms that the price of mortgage is the mortgage interest rate or the mortgage yield. In general, the quantity of mortgage credit demanded or supplied by a particular sector is dependent on the mortgage interest rate (Dasso, et al., 1995). In free economies, the interest rates will regulate both the supply and demand side of the mortgage market by moving up to eliminate excess demand for mortgage funds and down to eliminate excess supply. Thus, Interest rates are generally high because of low supply of loanable funds and high demand for loans (Habib, 2008). 2.7.1.2 Risk Factors An important factor that affects the supply of mortgages for specific economies is inflation (BoG, 2007). Anticipated inflation affects the nominal interest rates charged, the type of model to adopt and the calibre of income the mortgage bank is to consider. High quoted repayments and the front-loading of payments compensate for losses in purchasing power over time (Asare and Whitehead, 2006). In the absence of appropriate instruments, lenders risk loss in terms of the value of regular repayments. So models are structured to cut of specific income bracket, increase their rate or index the rate to a Consumer Price Index (CPI)

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Credit risk, which is the degree to which a lender perceives a particular borrower as unlikely to pay the debt due him. Financial institutions in supplying mortgage take into consideration the calculated risk as to the possibility of the client defaulting in payment taking cognizance of the trend of historical trend of default payment, payslips, bank statements, in view of the current economic situation. Credit risk is not much of a problem to the lenders as the can fall on the property at times of default through court action to redeem their losses. Exchange rate risk is also considered by financial institutions who borrow funds from foreign sources or of international nature. Usually such institution supply mortgages indexing the interest to a foreign currency. Countries that have high exchange rate volatility usually have higher interest rate or fewer lenders in the mortgage market. 2.7.2 Demand Consideration of a Mortgage Instrument Design Studies of the demand for residential mortgages have tended to concentrate on the contract rate as the principal determinant of the demand for mortgage loans. While the interest rate is generally regarded as the price of funds in the mortgage market, it is only one of the several loan terms that affect the cost and the desirability of a mortgage loan to the borrower. (Rudolph and Zumpano, 1986) 2.7.2.1 Cost of the Mortgage Instruments The demand for housing is inversely related to price and directly related to permanent income. Because mortgage loan qualification is based on current income, it will separately affect demand (Dynarski and Shefrin 1986). The expected growth rate of income will also positively influence housing demand (HD). Individuals are more inclined to increase current demand to long- term

37

preference levels to avoid transactions costs. Changes in the price of mortgage credit affect housing demand which in turn affects mortgage credit demand. Demand for mortgage credit is not, however, a perfect proxy for housing demand. Changes in interest rates can influence mortgage credit through channels other than derived demand. For example, interest rates influence the demand for mortgage credit as a tool for liquidizing home equity when consumer want to shift wealth to another form of asset or they want to draw down wealth to support current consumption (including tuition bills). 2.7.2.2 Qualification Constraints Mortgage qualification constraints, thus, payment-to-income ratio, loan-to-value ratio, down payment, and monthly payment are major determinants of mortgage demand as these have the tendency of redlining many potential borrowers from the mortgage market (Zorn, 1993; and Philips and Vanderhoff, 1994). Motivated primarily by the concern over default risk, lenders offering conventional home mortgages typically require borrowers to meet some standard down payment and payment to income requirements (Zorn, 1993). It is usually difficult for households who do not meet these criteria to obtain mortgage loans and even when available, they generally carry prohibitive interest rates to compensate for this risk (ibid). In addition, there are statutory restrictions on borrowers income to loan ratio, for example in Ghana, a borrowers monthly payment must not exceed 40% of ones income (GHL 2012). This again is problematic in developing countries where income levels are generally low. It is therefore submitted that relaxing mortgage qualification constraints has a greater impact on

38

renters possibility of owning their own homes and the expected demand for newly purchased owner-occupied housing would increase (Zorn, 1993). 2.7.2.3 Demographic Variables The aggregate demand for mortgage in an economy will also depend on the demographic factors such as the population level, number of households, age structure and the sex ratio. Generally, a high population implies high demand for all forms of commodities including mortgage funds. An increase in population implies that more housing units are required. The demand for all forms of housing, will be dependent on the number of households, as the number of households increases, the demand for housing will increase and the demand for mortgage funds will also increase (Rudolph and Zumpano, 1986) Generally, mortgage loans require longer periods for servicing the loan. Prospective home owners beyond certain age limits may therefore be unwilling to go in for mortgages for fear of not being able to finish repaying the loan mortgage (Zorn, 1993). Lending institutions are most conscious about default risks and usually have age-limits beyond which one does not qualify for a mortgage. In situations where such persons are granted the mortgage, they are often required to take a comprehensive life insurance policy, which adds up the cost of borrowing to make the mortgage unattractive (ibid). 2.7.2.4 Economic Variables The most significant determinant of mortgage affordability and for that matter mortgage supply in developing countries is the mortgage interest rate. The mortgage interest rate is a measure of risk in lending credit in an economy. The rate is determined by a composite of variables and as such should be adequate to compensate for the expected risk (Donkor- Hyiaman, 2011). Higher

39

interest rate implies higher periodic payments and/or longer terms and this can make mortgage funds generally unaffordable to low income earners thus reducing mortgage demand. Inflation and the associated currency depreciation, is also a major variable affecting the preparedness to supply, the forms of mortgages available and the pricing of these mortgages (Asare and Whitehead, 2007). In an inflationary environment, lenders charge high inflation premium in order to compensate for purchasing power loss (ibid). This implies higher periodic payments and hence many potential borrowers are priced out of the market. In addition, the long-run demand for housing responds negatively and proportionately to increase in the price of housing (Kenny, 1999) hence increase in the price of housing has an impact on the demand for mortgages. In Ghana, the high prices of houses offered by real estate developers which are mostly quoted in foreign currencies is one of the key reasons why Ghanaians have not been active participants in the mortgage market. This is because the cedi equivalent of these houses could increase daily in absolute terms depending on the going exchange rate. As a result, a large segment of the population is effectively excluded from access to housing properties built by real estate developers, which are typically the kinds of houses financed by the mortgage lending institutions (BoG, 2007) 2.7.2.5 Other Factors Other important determinants of demand for residential mortgage funds include the loan to value ratio, maturity, already existing burden of debt on the prospective borrower and other socio cultural factors. Rudolph and Zumpano (1986) recognized that, the loan amount, that is loan-tovalue ratio and the maturity are important determinants of mortgage demand. Thus if lenders are willing to supply a larger percentage of the required fund for a longer period, the demand for

40

mortgage would increase. In addition, as ones already existing burden of debt (i.e. consumer debt as a percentage of his income) increases, the more reluctant he will be in incurring further loans (ibid). Moreover, as the cost of home ownership in the form of maintenance fees and property taxes rises, demand for mortgage funds will fall, as most people will then prefer to rent than to own (ibid)

2.8 Conclusion
It is extrapolated from the above views that, there is no one superlative mortgage instrument from a general market since each mortgage instrument has been crafted to suit borrowers or lenders strengths and preferences. To stick to one model as being outstanding is rather absurd in view of the fact that every mortgage design has forte and limitation. However Regulation may have an important influence if it bans or dictates certain features.

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CHAPTER THREE AN OVERVIEW OF THE GHANAIAN MORTGAGE MARKET 3.0 Introduction This chapter gives an overview of the Ghanaian Mortgage Market. It identifies the major players in the provision of mortgage financing in the country, the various mortgage products they offer and their effects on affordability. The consumers preferences, abilities and constraints in securing a mortgage are also examined. 3.1 Macro-Economic Position Of Ghana The Ghanaian economy has been described as an agrarian economy and this is marked by the employment of more than 50% of total workforce in that sector. Other vibrant sectors of the Ghanaian economy are mining, industrial, real estate, among others. Over the past 5 years, the economy has recorded a considerable level of economic growth with the highest being a 13.6% G.D.P growth in 2011 which has been attributed to proceeds from the new oil and gas industry. Projections made by the Ghana Statistical Service (2010) suggest an average 10% economic growth in the next few years. Inflation has been on a downward trend since it peaked at 20.7% in June 2009. This fall in inflation, according to the Monetary Policy Committee of the Bank of Ghana, has been driven by both non-food and food inflation. Inflation as at May 2012 was 9.3%. A single digit inflation rate of 9.44 %was achieved at the end of August 2010, which led to a corresponding drop in the prime rate by the Bank of Ghana to 13.5% by February 2011. Inflation which was at 8.58% in December of 2010 has fallen further to 8.39% as of July 2011. (KPMG, 2012)

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Figure 1 Inflation Rate from January 2000 January 2012

As displayed above, the Ghanaian market has an inflationary trend which is not static and therefore induces the mortgage lending institution to increase the quantum value of the inflationary risk causing interest rate to rise. The cedi has slipped against the dollar by 19% and has been fluctuating against major currencies since the beginning of 2012. It is currently experiencing some depreciation against major trading currencies, and the exchange rate is GH1.96: US$1. Expectations are that the local currency will appreciate against the major foreign currencies and this would improve foreign exchange risk for companies in Ghana. Figure 2 Ghanaian Cedi to U.S dollar Exchange Rate from 2000- 2012

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Source: www.tradingeconomics.com The Ghanaian salary workers for a considerable number of years now enjoyed increment in their minimum wage rate. The yearly change of the minimum wage has not been less than 15% of the initial amount. Whether or not such increments make significant impact in the living standards must be looked at in tandem with economic prevailing circumstances especially inflation. The Table below shows the minimum wage trend and the percentage change over the years. Table 1 Minimum Wage Trend 2007 -2012 Year 2007 2008 2009 2010 2011 2012 Average increase Source: www.Mywage.org/Ghana 3.2 Housing Finance Systems in Ghana Home ownership is an aspiration which tends to be more of a dream than a reality for most Ghanaians, despite various government systems and interventions, since there is a need for large capital to build, buy or rent a house. The purpose of a housing finance system is to provide the funds which home buyers need to purchase their homes (Boleat, 1985). However, the essential feature of any system is, the ability to channel the funds of investors to those purchasing their homes (ibid). In many developing countries such as Ghana, however, the system is limited; especially in the number of ways by which it can be achieved. 44 Minimum wage GH1.90 GH 2.25 GH 2.65 GH 3.11 GH 3.73 GH 4.48 Percentage change 18.75% 18.42% 17.78% 17.36% 19.93% 20.00% 18.71%

Housing finance is undeniably vital to every economy because it accounts for a sizeable portion of a country's productive activity through backward linkages to land and labor markets, as well as related industries. In Ghana, it is estimated that only the rich or a few people have access to it. With a population of about 25 million, Ghana currently has a labor force of over 11.44 million and its economic fortunes are looking brighter with a per capita income of $1,820 as at 2011 (CAHF, 2012). With the increasing population and governments inability to meet the countrys widening housing deficit of 1.7 million, housing finance remains a viable alternative to explore. However, due to the fact that majority of the populace operate in the informal sector, while a few in the formal sector are also grappling with low income levels, it tends to be difficult to venture into housing finance. Economic performance has improved in recent years with growth rate reaching 6.4 percent in December 2007 increasing to 7.7% in 2010 and to 13.6% in 2011; while inflation had remained slightly stable keeping interest rates also slightly firm but the housing finance market has not seen massive development due to the inability of the urban poor to acquire their own houses. Though some real estate companies such as Regimanuel Gray, Manet and Ayensu Real Estates Limited have constructed some affordable houses for sale, the prices have been high, ranging from $35,000 upwards. One of the housing finance systems that exists in Ghana and the most commonly used is the Informal approach, usually referred to as Incremental building. With this approach, housing is either self-financed that is by equity accrued through many years of prior savings or financed directly by borrowing from friends, relatives, etc. This approach to housing development is seen

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as both expensive and ineffective (Smet, 1996). It takes a long time, often between five and fifteen years, for participants in the informal sector to complete the dwelling, which can massively increase construction costs (Asare and Whitehead, 2006). Although attempts have been made to transpose this system, moving it towards a more sustainable method of housing finance, these have met with severe challenges from the economic, legal and regulatory environment (ibid). Governments have also been involved in housing finance through state institutions like the Social Security and National Insurance Trust (SSNIT), Tema Development Corporation (TDC) and the State Housing Corporation (SHC, currently the State Housing Company Ltd). Nevertheless, these sources of housing funds have proved largely inadequate and unsustainable culminating in a huge housing deficit (measured by the difference between housing stock and total number of households) in the country (Boamah, 2010). It is for this reason that, various financial institutions have come together to provide funds to the populace in the form of mortgage to help them acquire their houses. 3.3 Provision of Mortgage in Ghana Mortgaging has become a major housing finance tool around the globe. Although it has registered a significant progress, the Ghanaian Mortgage Market continues to face drawbacks such as high interest rates, negative conception about borrowing money, and so on, which inhibits its growth. The growing mortgage market still only sits at 0.5 % in 2012 (CAHF, 2012). The country recorded a Mortgage debt to GDP at 0.37 % in 2007; fell to 0.42% in 2008, 0.3 % in 2009 and 0.25 % in 2010, due to the global financial crisis and the prevalence of borrowers from the diaspora in Ghanas mortgage book.

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Over the past years, the countrys financial system has seen intensive regulatory reform and restructuring, resulting in the upsurge of credit offered by commercial banks in the country. The country has a well- developed microfinance sector that is beginning to make inroads into housing. Like commercial banking however, it suffers from the lack of long term funding. Ghanas pension industry for instance is small with only nine per cent of the labour force being contributors. It therefore has a long way to go to create the necessary systems to support mortgage lending although it is registering some progress. A household name in Ghana when it comes to housing finance is HFC Bank or perhaps Ghana Home Loans. Pro-Credit in Ghana also launched a housing improvement loan in 2006. Nonetheless, access to finance in the country is still limited across various financial products. (Ghanaproperty.com, 2013). The number is low because supply is limited: there are essentially only two major lenders at present HFC Bank with 30 per cent of market share and Ghana Home Loans, a specialized lender. HFC Bank offers housing loans in collaboration with CHF International. 3.3.1 Home Finance Company (HFC) HFC Bank, initially a non banking institution and private limited liability company emerged as a result of the introduction of the Mortgage Finance Law, 1993 (PNDCL 329) was setup with the primary objective to provide the service of Mortgage Finance and mobilize funds for mortgage finance. It was later transitioned into a banking institution (HFC Bank, 2005). Even though it was able to achieve its first objective, it was not able to sustain the second as a secondary mortgage. Three reasons were identified as responsible for the failure, all of which were also related to the fundamental reasons for the continued lack of a firm primary market. First, financial institutions did not consider the commission of 1.5% per annum attractive enough to

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make it worth their while; second high treasury rates made the whole operation too uncompetitive; and finally the issues of risk and affordability made the introduction of indexed mortgages necessary because for the high inflation - unacceptable (HFC, 2001). This led the bank to assume the role of a primary mortgagee. However, with these shortcomings, HFC can still boast of being the leading mortgage provider in Ghana. The HFC, by 2007 had originated approximately US$63,442,294.73 (GH61,564,406.69) to roughly 4,453 mortgagors in the country. The HFC originated its highest amount of mortgages in 1994, when it offered mortgages to 824 mortgagors. The lowest number of mortgages originated by the HFC occurred in 2004 when it originated only 82 mortgages (Boamah, 2010). Mortgage products offered by HFC include the Home Purchase Mortgage (HPM), Home Improvement Mortgage (HIM), Home Completion Mortgage (HCM), and Home Equity Mortgage (HEM). The mortgage may be either variable or a graduated payment mortgage (GPM). With the unpredictable nature of inflation in the country lenders see no alternative to the use of high interest payments and variable mortgage instruments (Asare and Whitehead, 2006). 3.3.2 Ghana Home Loans (GHL) Ghana Home Loans (GHL) as a non banking institution commenced operation in 2006. As of 2009 it had disbursed over 550 loans worth close to US$40 million. It partners with Ecobank, Merchant Bank, Fidelity Bank, HFC Bank in the Ghana Primary Mortgage Market Initiative (GPMMI). In 2011, GHL disbursed US$20 million in new loans for new homeowners. With a portfolio of about US$65 million, GHL has about 1 000 mortgages and in January 2012, Shelter

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Afrique signed a US$ 5 million facility with GHL to provide mortgages for at least 200 individuals in the middle income bracket (CAHF, 2012). GHL mortgage products include Home Purchase Mortgage, Home Equity Mortgage, Home Completion Mortgage and Home Improvement Mortgage and operates on both cedi and dollar rated mortgages with most of its customers operating on the dollar rated mortgages at 12.5% interest rate and the cedi mortgage at 30%.It offers mortgages to borrowers between the ages of 18years to 52years with regular income security. The institution has a loan to value ratio (LTV) of 80%, i.e. 20% down payment. It offers loan as low as $10,000 to $100,000 depending on the borrowers income flow. The repayment period of a mortgage is usually between 7 to 20years. 3.3.3. Fidelity Bank Fidelity bank came into existence in 2006 and has since contributed a significant quota towards the development of the mortgage market. Owing to its commitment to mortgage lending and housing deficit reduction, it boasts of a stand-alone mortgage department with well trained staff to help instigate interest among Ghanaians in mortgage borrowing. The Banks mortgage

products include Home Purchase Mortgage, Home Equity Mortgage, Home Completion Mortgage, Home Improvement Mortgage and Employee Assisted Mortgage Program. The fixed rate fixed payment mortgage type is largely used and currently all loans and amortisation payments are dollar rated. Mortgage rates between 2007 and 2011 have hovered around 12 % (2007 and 2008), 13 %( 2009), 13.5 %( 2010) and 12.5 %( 2011). Presentation of fully perfected property particulars, valid identification card, bank statement and most recent three months pay slip are some of the requirements that need to be met in order to be considered for a mortgage loan. Other ancillary costs associated with mortgage

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application are professional fees, insurance premiums, and legal fees, among others. (Kugbega, 2012) 3.4 Mortgage Repayment Models in Ghana Generally, the main type of model used here in Ghana is the Fixed Rate. Graduated Payment Mortgages are used in Ghana. Indexed mortgages (inflation indexed mortgages) used to be offered by HFC, but the Bank no longer offers inflation indexed mortgages because the company no longer has access to indexed funds to match such mortgages (HFC, 2001) and both Ghana Home Loans and Fidelity Bank make use of the constant Payment Mortgage in their activity. 3.4.1 Fixed Rate Mortgages (FRM) These are mortgages with a fixed or constant rate that requires the mortgagor to make constant payments through the life of the mortgage. The market rate of interest on these type of mortgage loans is established by what borrowers are willing to pay for the use of funds over a specific period of time and what lenders are willing to accept in the way of compensation for the use of such funds (Brueggeman and Fisher, 2001). Variants of the FRMs used in the country include the Constant Payment Mortgage and the Constant Amortization Mortgage. 3.4.1.2 Constant Payment Mortgage (CPM) This is one of the most common loan payment pattern used in real estate finance. Institutions like Fidelity and Ghana Home Loans (Dollar facilities) usually use this payment model. It simply means that a constant monthly payment is calculated on an original mortgage loan at a fixed rate of interest for a given term. This model is based on the premises of discounting annuities (Brueggeman and Fisher, 2001). The discounting formula of:

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Monthly Payment = Ai (1 + i) n (1 +i) n - 1 Where A = the mortgage loan amount, i = the interest rate, and n = the term of the mortgage. Below is a payment schedule on a mortgage loan of GH 30,000 at an annual rate of 15% compounding monthly for 10 years using the CPM: Table 2 Constant Payment Schedule Opening Monthly Balance Payment 1 30,000.00 484.00 2 29,891.00 484.00 3 29,780.64 484.00 4 29,668.90 484.00 5 29,555.76 484.00 6 29,441.20 484.00 119 951.46 484.00 120 479.35 484.00 58,080.00 Total Source: Authors Construct (2013) Month Interest 375.00 373.64 372.26 370.86 369.45 368.02 11.89 5.99 28,081.34 Amortization 109.00 110.36 111.74 113.14 114.55 115.98 472.11 478.01 29,998.66 Ending Balance 29,891.00 29,780.64 29,668.90 29,555.76 29,441.20 29,325.22 479.35 1.34 -

Again, from the Table 2, it can be reckoned that constant payments are made from the beginning to the end of the mortgage period but the amortization of the principal increases over the lifetime of the mortgage. At the end of the mortgage period, the mortgagor should have paid the principal of GH 30, 000.00 (GH 29,998.66) and an interest of GH 28, 081.34, amounting to a total of GH 58, 080.00. Therefore from the above table, it is observed that the mortgagee tends to pay more interest on the loan in the CPM than the SCRBM, but begins the monthly payment with an amount lower than that of the SCRBM. This makes more households qualify for a CPM than for a CAM (Brueggeman and Fisher, 2001) 51

3.4.1.2 Standard Conventional Reducing Balance Mortgage (SCRBM) This mortgage model is so far only operated by the HFC bank, consisting of partial repayment of the principal. This model operates just like Constant Amortisation Mortgage. CAMs are determined by reckoning a constant amount of each monthly payment to be applied to the principal. Interest is then computed on the monthly loan (Outstanding) balance and added to the monthly amount of amortization. The total monthly payment is then determined by adding the constant amount of monthly amortization to interest on the outstanding loan balance. This type of mortgage is suitable for customers with adequate and stable incomes. Below is a payment schedule on a mortgage loan of GH 30,000 at an annual rate of 15% compounding monthly for 10 years: Table 3 Standard Conventional Reducing Balance Mortgage Opening Interest Balance 1 30,000.00 375.00 2 29,750.00 371.88 3 29,500.00 368.75 4 29,250.00 365.63 119 500.00 6.25 120 250.00 3.13 22,687.50 Total Source: Authors Construct (2013) Monthly Amortization 250.00 250.00 250.00 250.00 250.00 250.00 30,000 Monthly Payment 625.00 621.88 618.75 615.63 256.25 253.13 52,687.50 Outstanding Balance 29,750.00 29,500.00 29,250.00 29,000.00 500.00 -

From the above table it can be seen that the periodic monthly payments to be made by the mortgagor decreases over the life of the mortgage term whiles he has a constant amortization of the principal (GH30,000). At the end of the 10 year period, he pays the GH 30,000 loan amount with an interest of GH22,687.50. This finally amounts to a total of GH52,687.50 at the end of the mortgage. 52

3.4.1.3 Flexible (Flex) Payment Method This model is no different from the Graduated payment Model. This addresses the needs of low income households and young professionals whose income may not otherwise qualify them for a Constant payment or standard Conventional reducing Balance method to own a home. It allows the borrower to initially pay lower monthly instalments using 30% to 35% of his/her net income. The repayment is then increased by a specified percentage each year so that the loan can be fully amortised at the end of the term. As the borrower rises in the work place through promotions and salary increases, the borrower accelerates the monthly repayment to cover both interest and principal. The main advantage of this plan is not affordability as stated by the HFC but accessibility, because of its low starting repayments, one can qualify for a larger loan with less income. The inherent problem with this method is that default risk becomes high as the mortgage progresses and when increment in salary and promotions are not as expected. 3.5 Mortgage Affordability Analysis With reference to the above mortgage repayment options, it can however be said that, affording a mortgage in Ghana tends to be of great difficulty. Hence, this constraint deters most of the populace from securing a mortgage loan. The Ghana Real Estate Developers Association (GREDA), (1998) goes ahead to indicate that about 60 % of Ghanaians would need financial assistance in the acquisition of a home. Apart from the huge monthly commitments, various factors come into play to make mortgages unaffordable to most Ghanaians. These include; 3.5.1 Interest Rates on Mortgages It is fact that the housing services offered by these mortgage finance institutions are beyond the affordability of majority of shelter seekers. Interest rate for fixed mortgages in Ghana lies between 28% - 32% as compared to 6% - 8% in the USA and the United Kingdom making the 53

general mortgage package unacceptable. Also major financial institutions and mortgage entities use the dollar rated mortgage which reduces the rate of interest to between 12-13% and shift the exchange rate risk to the borrower. 3.5.2 Income Levels and Security Another factor which affects affordability is the low income levels of Ghanaian households. For example, for a mortgage of $30,000, the monthly mortgage will be US$250 and requires that the prospective mortgagor be earning about US$750 a month to qualify. Of those formally employed, salaries range from US$200 to U$2,000 a month, or an average of about US$485 a month, much below the US$750 required to purchase an entry-level house (CAHF, 2012). Studies have also revealed that over 60% of the working forces of the Ghanaian populace are private workers with majority of them being self- employed. These self- employed workers do not have security and regularity of income which automatically disqualify them from a typical mortgage loan. 3.5.3 Initial Down Payment Financial institutions require usually, 15% - 25% down payment of the loan amount which most at times is not within the reach of the prospective mortgagee. The three major mortgage players in Ghana have their down Payment fixed at 20% of the mortgage value which is quite unsupportable in developing mortgage market with dominantly low income range. 3.5.4 Age Qualification Eligible mortgagors must have attained the age of 18 years and not older than 50 years to qualify for a home purchase mortgage. While this becomes a strict regulation for some mortgage finance institutions, others grant mortgages to persons outside this range in certain circumstances. 54

Example, HFC Bank may grant mortgages to persons above 50 years if the mortgagor can proof alternative source of income capable of accruing the repayment in due time or can provide a blood relation preferably wife or child who can make good the repayment of the loan. 3.6 Conclusion From the preceding paragraphs, it can however be concluded that despite efforts being put in place to by the Government and other private stakeholders, the Ghanaian mortgage market still needs a suitable housing finance scheme or model capable of mitigating the affordability and flexibility problems exhibited above on the consumer, bearing in mind the suppliers or producers constraints.

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CHAPTER FOUR DATA PRESENTATION AND ANALYSIS

4.0. Introduction This chapter presents and analyses data relating to the supply and demand of mortgage products, with primary data collected from the field through personal interviews and questionnaires; and accurate secondary data collected from extensive published sources. Primary data gathered consist of both a qualitative and quantitative nature. The quantitative data is critically analysed by the use of the Statistical Package for Social Sciences (SPSS) and Microsoft Excel. A further usage of bar charts, line graphs and pie charts are used to give a detailed graphical presentation of the data. This is basically aimed at fulfilling the objectives of the study, as earlier stated. The sources of the data include mortgage lending institutions and a sample of regular income earners.

4.1 Demand for Mortgage 4.1.1 Description of Data Sources To identify the variables that relate to and affect demand conditions in the Ghanaian mortgage market, questionnaires were issued to 150 respondents who are regular income earners of both private and public sector institutions and were accidentally selected from various parts of the country. The category of employment was required since it forms one of the fundamental requirements lenders consider in giving out mortgage loans as this determines the security of the income. Public sector workers numbered 86 representing 57.3%, private sector workers 56

numbered 54 making 36.0% and 10 self-employed workers also made up 6.7% of the total respondents. The respondents comprised 95 males representing 63.3% of the total respondents and 55 females who make up the remaining 36.7%. Their ages ranged between 21 and 60. There were 99 married individuals, 47 single individuals and 4 divorced respondents. All respondents were literates, all gainfully employed with 8 respondents forming 5.3% being SHS graduates 97 forming 64.7% tertiary graduates and 45 forming 30% being post-graduates. These findings are represented in the tables below: Table 4 Description of Respondents Variable Sex Values Male Female Total Age Respondents of 21 30 31 40 41 50 51 60 Total Marital Status Single Married Divorced Total Education Level SHS of Respondents Tertiary Post-graduate Total Source: Authors Field Survey, March 2013 57 Frequency 95 55 150 42 64 31 13 150 47 99 4 150 8 97 45 150 Percentage (%) 63.3 36.7 100 28.0 42.7 20.7 8.7 100 31.3 66.0 2.7 100 5.3 64.7 30.0 100

of Respondents

4.1.2 Incomes In order to qualify for a mortgage the incomes available to an individual ought to be estimated in order to determine the ability of the individual to afford the mortgage. The general basic incomes of respondents are shown below: Figure 3 General Income levels of Respondents

Monthly Income (GH) of Respondents

Number Of Respondnets 50 40 30 20 10 0

Monthly Income (GH)

Less than 500 12

501 1,000 29

1,001 1,500 30

1,501 2000 29

Above 2000 50

Source: Authors Field Survey, March 2013 From the above data the general average income received can be reckoned as GH 1,504. This means about 47.3 % of the respondents are below the average income whiles 52.7 % receive incomes exceeding the average income calculated. Typically, a person earning an average amount of GH 1,504, can be able to access a maximum loan amount of about $30,000.00 without statutory restraints. In as much as a person would want to go in for a mortgage, several expenditures crop in for him to deal with.

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Table 5 Sources of Incomes Source of income Profession Inheritance Self - developed Properties Allowances Other Total Source: Authors Field Survey, March 2013 From table 4.2 above, 86% out of the 150 respondents derived their incomes from their professions. These professions included teaching, engineering and lawyering, among others. It could also be observed that 6.0% derived their incomes from self-developed property; 4.7% from Inheritance; 2.0% from other unnamed sources and 1.3% from allowances. Table 6 Respondents Employment Category Respondents Employment Category Frequency Civil / Public Worker Private Institution Worker Self Employed Total 86 54 10 150 Percentage 57.3 36.0 6.7 100.00 Frequency 129 7 9 2 3 150 Percent 86.0 4.7 6.0 1.3 2.0 100.0

Source: Authors Field Survey, March 2013

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Figure 4 Comparison between Employment Categories and Income Levels

Employment Categories and Monthy Income Levels

Numbe of Respondents 30 25 20 15 10 5 0 Less than GHC 500 Civil / Public Worker Private Institution Self - Employed 6 3 3 GHC 501 GHC 1,000 17 11 1

GHC 1,001 - GHC 1,500 24 6 0

GHC 1,501 - GHC 2,000 13 14 2

Above GHC 2,000 26 20 4

Basic Monthly Income Levels

Source: Authors Field Survey, March 2013 From the chart above, there appears to be a comparison between the employment types and monthly incomes. With majority of income earners in the public sector earning beyond GH1, 000 the concentration of incomes are found between GH 1,000 and beyond GH2, 000. Here, the average income can be estimated to be GH1,460. With regards to the private sector, majority of the incomes earned range between GH1,500 and beyond GH2,000. The average income earned in this sector can be estimated to be GH1, 593. The self-employed respondents receive incomes mostly lower than GH 500, and above GH 2,000.

4.1.3 Savings and Expenditures The proportion of incomes used for various expenditures and commitments are analysed here as this greatey influences and determines the amount of disposable income available to the individual and thus, his ability to afford mortgage. Data indicates that a large portion of the 60

respondents income goes into Housing Utitlities, Food, Education and Investment, Loan Amortization, Clothing, and others expenses respectively. This is clearly shown in the chart below. Figure 5 Expenditure Pattern

Monthly Expenditure
Number of Respondents 40 35 30 25 20 15 10 5 0 38 18 23 10 23 3

35

Source: Authors Field Survey, March 2013 Apart from the expenditure patterns, most of the respondents were able to save a portion of their incomes to meet future obligations. Estimating the average percentage of savings from the chart below, an individual could save 18. 94 % of his income. With this average and a general average income of Gh 1,504, it stands to reason that Gh 284.85 (Gh1,504 x 18.94%) is the individuals average savings per month.

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Figure 6 Proportion of Income Saved

Abov e 50 % 31% - 505% % 11%

Proportion Of Income Saved

0%-5% 23% 6 % - 15 % 34% 0%-5% 6 % - 15 %

16 % - 30 % 27%

16 % - 30 % 31% - 50 % Above 50 %

Source: Authors Field Survey, March 2013

4.1.4 Housing Situation The current housing characteristics of the respondents were necessary to affirm the earlier stated facts, regarding the countrys poor housing delivery, in the previous chapters. From the study it is realised that 73 live in rented apartments, 36 live in family homes, with only 34 living in fullyowned accommodation and 7 living in other forms of housing such as government institutional houses, among others. Figure 7 Distribution of Housing Types
Others 5%

Type of Housing Arrangement

Full Ownership 23% Full Ownership Rentals Rentals 48% Family Property Others

Family Property 24%

Source: Authors Field Survey, March 2013 62

4.1.5 Mortgage as a Mode of Housing Finance Information was gathered on the respondents knowledge and attitude towards mortgage as a mode of financing houses. Data revealed that 34 of the individuals representing 22.7% had benefitted from mortgage loans and 116 representing 77.3% had never benefited from the use of mortgage. These 34 respondents used the mortgage for purchase of a house, to construct, to complete, to improve an existing house and, to refinance an existing loan. Clearly it could be seen that quite a number of the respondents had no experience in securing mortgages and there is generally a low mortgage patronage on the part of the populace.

4.2 Supplies in the Mortgage Market

4.2.1 Description of Data Sources In order to determine a suitable mortgage model for the developing economy; Ghana, data was collected from three major mortgage lending institutions; HFC Bank, Fidelity Bank and Ghana Home Loans. This was through personal interviews and reliable searches from published

materials, to help identify the variables that affect supply in the countrys mortgage market. The data as recorded are presented in the table below.

Table 7 Mortgage Requirement of Ghanaian Financial Institution Requirements of Ghana Home Loans lending institution Minimum down 25% of property value hence highest payment LTV ratio at 75% Fidelity bank 20% of property value hence 80% LTV ratio H.F.C Bank 20% of property value hence LTV at 80%

Age range (years) Facility fee

18-65 1% of loan 63

18-60 Nil

18-60 Nil (resident Ghanaians)

Processing fee Valuation fee Maximum loan

$200 $300 - $500 3 times annual salary $100,000

1.5% of proposed loan Valuers own charges Subject to customers credit profile Subject insurance company to

1.5% of proposed loan or $250 Valuers own charges Subject to customers credit profile Subject to insurance company 2% of loan amount 5-20 years GH or US$

Property insurance

0.2% value

of

property

Legal fees

2% of loan value

7-20 years Mortgage term GH or US$ Currency Source: Authors Field Survey, March 2013

2% of loan amount 5-20 years GH or US$

Therefore, if an average income earner of GH 1,504 wants to access a mortgage loan of $30, 000 (GH 57, 000) he has to make an initial down payment of $7,500 at Ghana Home Loans, whiles he has to make an initial down payment of $6,000 at HFC and Fidelity Bank. Therefore using a Constant Payment Mortgage scheme, with a rate of 12%, the monthly payment for a period of 15 years, the borrower would be required to make a payment of $288.05 ( GH 550.17) and an initial down payment of $6,000. This simply cuts down the number of people who can afford an outright down payment of $6,000 (GH11,400) which may be readily unavailable to them. This is illustrated below: 4.3 Repayment Method Analysis 4.3.1 Constant Payment Mortgage Schedule (Fidelity Bank & Ghana Home Loans) The important area of this analysis is the interest Accumulation, Accessibility of the mortgage product. The average interest rate for the dollar mortgages for the selected financial institution is 12%. Using the usual down payment of 20%, current exchange rate of GH1.91- $1 (March, 2013) and the least decent accommodation of $30,000. Therefore, the cedi equivalent of the

64

$30,000 is GH 57,300. The down payment required would be GH 11, 460 hence the principal loan amount to be amortised will be GH 45,840. The analysis can be reckoned as follows: Table 8 Constant Payment Mortgage Schedule (Fidelity Bank & GHL) Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Total Payment 550.16 550.16 550.16 550.16 550.16 550.16 550.16 550.16 550.16 550.16 550.16 550.16 550.16 550.16 550.16 550.16 99,028.8 Interest 458.4 446.762 433.649 418.87 402.22 383.45 362.31 338.49 311.65 281.40 247.31 208.90 165.62 116.86 61.90 5.432 53,187.32 Principal 91.76 103.39 116.51 131.28 147.93 166.70 187.84 211.66 238.50 268.75 302.84 341.25 384.53 433.29 488.25 544.727 45,841.48 Loan Amount 45,840.00 45,748 44,573 43,248 41,756 40,074 38,179 36,044 33,638 30,927 27,871 24,429 20,550 16,178 11,253 5,703 -1.48 40% of Income 1,375 1,375 1,375 1,375 1,375 1,375 1,375 1,375 1,375 1,375 1,375 1,375 1,375 1,375 1,375 1,375

Source: Authors Field Survey, March 2013

From the analysis above, it is realised that the constant payment mortgage type meet the qualification conditions of an average income earner ofGH1,500 to qualify for a mortgage loan, if he or she is ready to contribute GH550.16 monthly payment for 15 years. This condition may at the face view seem suitable and accessible to the average Ghanaian income earner however a red flag is raised at the onset of the mortgage. The down payment of 20% may require the borrower to save GH191 for 5 years before meeting the obligation of the down payment. Also default risk becomes high at the initial periods where monthly payment is below the regulatory limit of 40% but higher than 35% i.e. the

65

maximum amount a borrower can save for mortgage. Moreover the interest of GH53,187.32 is even much more than the borrowed amount GH45,840. This therefore have a psychological effect on the borrower, making borrowers refrain from mortgage.

4.3.2 Standard Conventional Reducing Balance Mortgage (HFC BANK) This is one of the two models implemented by HFC in Ghana, mainly designed for high income bracket. It enables high repayment especially in the first five years and payment reduces considerably towards the end of the mortgage. Table 9 Standard Conventional Reducing Balance Mortgage (Constant Amortization) Year Payment Interest Principal Loan Amount 45,840.00 45,585.34 42,529.42 39,473.50 36,417.58 33,361.66 30,305.74 27,249.82 24,193.90 21,137.98 18,082.06 15,026.14 11,970.22 8,914.30 5,858.38 0 40% of Income 1,782 1,706 1,629 1,553 1,477 1,400 1,324 1,248 1,177 1095 1,018 942 865 789

1 713.06 458.40 254.66 2 682.50 427.84 254.66 3 651.94 397.28 254.66 4 621.38 366.72 254.66 5 590.82 336.16 254.66 6 560.26 305.60 254.66 7 529.70 275.04 254.66 8 499.15 244.49 254.66 9 471.13 213.93 254.66 10 438.03 183.37 254.66 11 407.47 152.81 254.66 12 376.91 122.25 254.66 13 346.35 91.69 254.66 14 315.79 61.13 254.66 15 0 0 0 Total 87,325.07 41,486.2 45,840.00 Source: Authors Field Survey, March 2013

The table above is a model operated by the HFC Bank in Ghana. The individuals income of GH15,000 may not be able to qualify him for this mortgage at the initial stages (1st to 5th Years) even if they are able to raise enough money for their down payment. Even though it appears unsuitable for the average income earner, it becomes much more convenient at the preceding 66

years. This reduces the default risk of the borrower as the loan proceeds further. Also the interest on the mortgage GH 41,486.2 is considerate as compared to other available models in the country. Nonetheless this model is not suitable for the average income earner.

4.3.3 Flexible (Flex) Payment Method (HFC BANK) This model is no different from the Graduated payment Model. This addresses the needs of low income households and young professionals whose income may not otherwise qualify them for a Constant payment or standard Conventional reducing Balance method to own a home. Table 10 Flexible Payment Mortgage (Graduated Payment Mortgage)

Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Total

Payment 320 352 387 426 469 515 567 624 686 755 830 913 1004 1105 1215 122,006

Interest 458 476 492 505 515 521 522 515 502 479 444 395 329 244 9.2 75,882

Principal -138.4 -124 -105 -79 -46 -5 45 108 184 276 386 518 675 861 1206 46,124

Loan Amount 45,840 45,978 47,719 49,272 50,571 51,541 52,089 52,107 51,469 50,026 47,602 43,994 38,964 32,236 23,486 -284 0

40% of Income 800 880 967.5 1,065 1,172 1,288 1,418 1,560 1,715 1,888 2,075 2,283 2,510 2,763 3,038

Source: Authors Field Survey, March 2013 It allows the borrower to initially pay lower monthly instalments using 30% to 35% of his/her net income. The repayment is then increased by a specified percentage each year so that the loan can be fully amortised at the end of the term. The above table illustrates an accessible payment in the beginning years with relatively higher payments approach the last years. This model accrues an 67

interest of GH 75,882 and a total payment of GH 122,006. However this model becomes favourable if the minimum wage trend of increment could apply to the average income earner.

4.3.4 Equity- Debt Rollover Scheme (Authors Proposed Model) The available models in Ghana as seen above are unfavourable in one way or the other to the average income earner. Affordability of mortgage products in Ghana currently is low. The situation can be improved upon when there is a suitable blend of equity and debt in financing mortgages. A critic of most mortgage literature is its insensitive approach to the down payment. Mortgage suitability will greatly be improved The individual can better afford access and pay moderate interest when he/she builds up substantial equity of 50% in 5 years in the form of down payment of the mortgage, by making constant periodic savings with the mortgage institution at a considerable interest rate. This equity then serves as security of deposit which eventually releases mortgagees of lock up capital on other mortgage transaction. Also at a point in time where the borrowers building up their equity in the institution are more than the mortgagors serving their debt term, there will be enough secured deposit to service the loan with or even without external source. i.e. the banks can internally generate funds to service their mortgage. This model is designed specifically to suit workers especially in the private sectors whose salary stays fixed for long periods of time. This model is illustrated below.

Table 11 Equity- Debt Rollover Scheme (First Schedule) Year 1 2 Payment 350.8 350.8 Interest Accrued 12% 3.508 45.604 68 Accumulated Fund 40% of Income 28,650 350 880 4,834 880

3 4 5 6 Total

350.8 350.8 350.8 350.8 21,048

87.7 129.796 171.892 210.48 6,619.64

9,822 1,531 21,314 27,257 28,668

880 880 880 880

Table 12 Equity debt Rollover Scheme (Second Schedule) Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Total Payment 495 474 453 431 410 388 368 346 325 303 282 261 240 219 198 60,585 Interest 12% 318 297 276 254 233 212 190 169 148 126 105 84 63 42 21 28,725 Principal 177 177 177 177 177 177 177 177 177 177 177 177 177 177 177 32,037 Loan Amount 31,800 31,800 29,676 27,552 25,428 23,304 21,180 19,056 16,932 14,808 12,684 10,560 8,436 6,312 4,188 2,064 -237 40% of Income 1,200 1,185 1,132 1,077 1,025 970 920 865 812 757 705 652 600 547 495

Source: Authors Field Survey, March 2013 Note: The 2nd Schedule is calculated based on the premises that house value increase by 20% in 5years (28,650*1.2) = 31,800, new loan amount. A critical analysis of the model above clearly shows the extent of its affordability, accessibility and moderate interest paid by the borrower. Suitability of a mortgage model for the Ghanaian mortgage market is determined by its affordability, accessibility and moderate interest payment, also on the supply side, suitability of a mortgage is answered by, its default risk index, low to medium term capital lockup, and securitization of funds.

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4.3.4.1 Features of the Equity- Debt Rollover Mortgage The equity- debt rollover mortgage just as any other mortgage model, exhibit some peculiar characteristics which makes it favourable in the micro economics of most developing countries. 1) Equity financing Essence- One of the major problems this model seeks to address is the release of lock-up capital of the Banks. The equity side of the computation serves as a mortgage backed security, which provides the financial institution with constant periodic payment and therefore release them of lockup capital for a long time. It is obvious that at a point in time where borrowers at the equity side are more than the debt side; the financial institution may use internal funds from the equity mortgage to service borrowers at the debt side. 2) Exchange Rate- This model is design to reduce payment as the years go by because of the index nature of Ghanaian mortgages. The reduction in the payment absorbs any change exchange rate increment. As illustrated in figure 4.11 and table 3.2, the average reduction in the payment is 0.95% which absorbs the average increment of exchange rate which is 0.94% 3) Accessibility Option- Another premise of this mortgage is that, the individuals responsibility increase with time, which increases the expenditure of the individual thereby increasing the risk of repayment. This model address this issue by reducing the individual debt obligation over time and therefore reduces the default risk associated with mortgages 4) Early Capital Release- This model apart from its contribution to security of capital at the equity stage, it is also suitable for financial institutions due to its characteristics of

70

making higher interest payment during the early part of the mortgage. This enables the banks to recoup higher proportion of interest for other businesses. 4.3.4.2 Perceived Challenges of Equity- Debt Rollover Type The Equity- Debt rollover mortgage despite its ability to increase possibility of mortgage qualification and affordability cannot be said to be infallible and without fault. Below are some of the challenges that could come with this mortgage type when practiced in the Ghanaian economic setting. (a) Long Period in Waiting- Unlike other mortgage models, a person opting for an equitydebt rollover may have to reconsider the timing. This mortgage model allows the borrower to only access the mortgage loan after the fulfillment of his equity obligation. It is expected that it may take 60 month (5yrs) for an average income earner of GH 1,200 to fulfill his equity obligation. Therefore urgent home seekers may debar this as a mortgage option. (b) Unrealistic Assumptions- This debt side of this mortgage computed premised on the assumption that, the price of a house may increase by 10% in 5 years. Such an assumption may defer depending of the location of the property, demand and supply and current economic indicators.

4.4 Conclusion As depicted in the preceding sections of this chapter, it can be concluded that the Constant Payment model as used by the Ghana Home Loans and the Fidelity Bank has an extortionate interest rate and hence does not favour the average income earner. The Reducing Balance model (Constant Amortization Model) as used by the HFC is not accessible at the initial stage and does 71

not qualify the average income earner even though interest rates are low as compared to the Constant Payment model. The study actually revealed that the down payment of the loan amount is not readily available to the average income earner. However if the borrower makes fixed periodic contributions as exemplified in table 4.10 to raise equity in the same financial institution, not only will he have release the lending institution from lockup capital, but will have adequately served the loan term with much ease, comfort and very low interest payment at the end of the mortgage term.

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CHAPTER FIVE SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION

5.0. Summary of Findings

Analysis in the previous chapter discloses the fact that Mortgage models employed in Ghana are highly inapplicable to the middle and low income earners in the economy. The Constant Payment Model which is typically dominating the mortgage market in Ghana is characterised by huge constant monthly payment, exorbitant interest rate and rigidity in operation coupled with economic instability and Global currency fluctuation. The analysis further revealed that the down payment and other incidental cost are not readily available to the middle income earner and deter first time mortgagor from mortgage transactions. The dollar linked interest rate of 12% -13% is high as compared to the 6% is the USA, UK and other developed mortgage market and this is due to the absence of mortgage backed security, the level bank of Ghana base rate and external borrower cost. This causes the rate of the cedi mortgages to rise astronomically increase, 28% to 32%. 5.1. Recommendations The findings made seem to show that affordability of mortgage products in Ghana currently is low. The situation can be improved upon and mortgage made affordable if the interventions discussed below are duly considered. The equity-debt rollover efficiently addresses most of the shortcomings of the dominant models in Ghana. The interest accumulation as seen by the existing Ghanaian model is classified as extortionate when compared to the equity-debt rollover. Using the same interest rate of 12%, 15years mortgage term, exchange rate of GH1.91 to US$1 and housing price of GH57,300 or 73

$30,000, a typical constant payment mortgage makes payment of GH 550.16 throughout the term, an accrued interest of GH53,187.32 and an instant down payment of GH11,460. The conventional reducing balance mortgage allows payment of GH713.06 in the first year reduce to GH560 in the fifth year and GH 305 in the fifteenth year. It accrues an interest of GH41,486.2 at the end of the term and takes a direct down payment of GH11,460. The Flexible (flex) Payment model seems affordable on the face of the initial payments, with the same variables, where the payment for the first year is GH320 and increases to GH1,215 at the end of the term. The total interest paid is GH 75,882 and the qualifying income increases from GH800 to GH3,038 at the end of 15 years. The proposed model, the equity-debt rollover allows the borrower to make specified fixed regular contribution to the mortgage institution to build his equity in the mortgage. The borrower contributes GH 350.08 monthly for 5 years to build his equity in the mortgage, which is GH28,650. He acquires the loan and fulfils his debt obligation. From the
1st

year of the debt

repayment, the borrower pays GH495 which reduces to GH198 in the mortgage term. The interest accrued on this mortgage is GH28,725 about 50% lower than the interest accrued on the existing mortgage models employed in Ghana. Further advantages of this model is that it reduces the default risk associated with the various mortgages because the individual has built substantial equity in the mortgage and will be willing to comply with the debt obligation to acquire full ownership of the house. The GH495 which is the highest contribution is less than 40% which the statutory limit, and hence encouraging. Equity-debt roller ensures that the bank at all times have reliable deposits which can be used as liquidable funds and relieves them of capital locked up in other mortgages.

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As stated in the foot note of the table 4.11, this model is based on the premises that the price of a mortgage increases by 20% in 5 years. Thus the mortgage is revalued, the outstanding amount is either added to or deducted from the loan value. The equity-debt mortgage type has upon analysis proven to be one mortgage type that is sensitive to the affordability questions being raised and is sure to increase mortgage market participation, comfortably house majority of the people of Ghana and finally reduce the housing deficit problems that the country is faced with. Despite its advantages, the equity debt rollover still faces the problem of frustrating the borrower in terms of the equity accrual period and the debt repayment period up till the actual occupation of the house. It is also based on assumptions that property values will increase by 10% in 5years, which may vary. The problem of age variations is also not catered for as the number of waiting years will not usually favour borrowers above 45years. We however recommend that existing models such as the Flexible mortgage of HFC should be restructured by setting a minimum cap rate of repayment every year with variable payments. This will enable the borrowers with uncertain salary pattern to access the mortgage with much flexibility rather than a fixed yearly rate.

5.2. Conclusion The main problem with mortgage product offerings in Ghana has been identified as low affordability levels and the current micro economic indicators influence its suitability. There is therefore the need for interventions in this market especially by government, mortgage lending institutions, international and local donors and a host of other stakeholders.

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In a renaissance economy like Ghana, characterised by high inflation, high interests, low credit information systems, poor knowledge on mortgage, non-existence of secondary mortgage market and other factors; it is better for the individual to build some level of equity on its own before falling on the financial intermediary for mortgage loans. The equity-debt rollover mortgage as partially practised by the HFC (the Home Savings Account) can therefore be embraced as a more suitable mortgage for the Ghanaian conditions. The flexible mortgage would also be suitable if payments are made variable to suit the irregular salary increments and promotions rather than the 10% annual increment.

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REFERENCES
1. Aha, B., (2012). Demand for Residential Mortgage in Ghana: Nature, Constraints and Implications. Unpublished Dissertation, Department of Land Economy, KNUST-Kumasi. 2. Alm, J. R. and Follain J.R.(1987). Consumer Demand for Adjustable Rate Mortgages, Housing Finance International. Housing Finance Review.Vol 6, pp.1-16. 3. Anderson R. and Lessard D.R.(1997). Mortgages in Brazil [online] Available from: http//www.aux.zicklin.baruch.cuny.edu [Accessed 5th March, 2013] 4. Asare, E. and Whitehead, C. (2006). Formal Mortgage Markets in Ghana: Nature and Implications. RICS Research Paper Series. Volume 6 (13). 5. Bank of Ghana (BoG), (2007). The Housing Market In Ghana: prospects and

Challenges. Ghana [Online]. Available from http:// www.bog.gov.gh /private content/Research/PolicyBrief/pbrief-housing-new [Accessed November 20,2012] 6. Boleat, M., (1985). National Housing Finance Systems: A Comparative Study.

Routledge: Nielsen Book Services Limited. 7. Brigham, E. T, (1982). Financial Management Theory and Practice. Third Edition. New York: CBS College Publishing. 8. Bruekner, J.K and Follain, J.R (1988), The Rise and Fall of the ARM: An Econometric Analysis Of Mortgage Choice. Review Of Economics And Statistics, Volume.10 (1) pp.93-102 9. Chambers, M.S., Garriga, C., and Schlagenhauf, D.,(2007). Mortgage Innovation, Mortgage Choice, and Housing Decisions. Federal Bank Reserve of St. Louis

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Chiquier, L. and Lea, M. (2009). Housing Finance Policy in Emerging Markets. Washington : The International Bank for Reconstruction and Development/ The World Bank.

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Chomsisengphet, S. (2006). The Evolution of the Subprime Mortgage Market. Available from: http//www.researchstlouisfed.org/publication. [Accessed on 1st November, 2012]

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Dasso, J., Shilling, J. D. and Ring, A. A., (1995). Real Estate. Twelfth Edition. USA: Prentice Hall

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Donkor-Hyiaman, A.K. (2011). Analysis of Mortgage Pricing Determinants and their Impact on Mortgage Affordability in Developing Economies. Case Study: Ghanaian Mortgage Market. Unpublished Dissertation, Department of Land Economy, KNUST.

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Erol, I., and Patel, K., (2004). Housing Policy and Mortgage Finance in Turkey during the Late 1990s Inflationary Period. International Real Estate Review 2004. Vol. 7 No. 1: pp. 98 120

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Gardener D., (2007). Access to Housing Finance in Africa: Exploring the Issues. FinMark Trust; Making Financial Markets Work For The Poor. Vol. 2 pp 1 - 17

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Gostkowska Drzewicka, M. (2011). Housing Markets in Selected European Countries and the USA. Financial Internet Quarterly e-Finanse 2012, Vol. 8, nr 1. Available from : http:// http://www.e-finanse.com/artykuly_eng. [Accessed: 1st January, 2013]

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Habib, M., (2008). The Effect of Interest Rates on Real Estate Investments in Ghana. Unpublished Dissertation, Department of Land Economy, KNUST Kumasi. 78

19.

HFC Bank, (2007), Challenges and Opportunities for Developing Mortgage Markets: The Ghanaian Experience. HFC Bank: Ghana. [online]. Available at:

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APPENDIX A
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY COLLEGE OF ARCHITECTURE AND PLANNING DEPARTMENT OF LAND ECONOMY RESEARCH QUESTIONNAIRE FOR INDIVIDUALS
Dear Respondent,

The researcher is a final year BSc Land Economy student conducting a research on the topic Assessing the suitable mortgage model in Ghana Case study of HFC Bank, Fidelity Bank, and Ghana Home Loans. YOU ARE ASSURED THAT ANY INFORMATION PROVIDED HEREIN IS FOR ACADEMIC PURPOSE AND WILL BE TREATED WITH THE STRICTEST

CONFIDENTIALITY. YOU ARE THEREFORE IMPLORED TO ANSWER THE QUESTIONS AS DETAILED AND ACCURATELY AS POSSIBLE. THANK YOU. Please complete this questionnaire by ticking () the applicable box or by providing the appropriate response in the spaces provided.

1. Age of respondent

[ ] 21-30 [ ] 41-50

[ ] 31-40 [ ] 51-60 [ ] Married Divorce [ ]

2. Marital status

[ ] Single

3. What is your highest level of education? [ ] JHS/Middle school [ ] Tertiary 4. How do you consider your employment? [ ] civil/public worker [ ] Private institution 81 [ ] Self-employed [ ] SHS [ ] Post-Graduate

5. What is/are your source(s) of income? (tick as many as applicable) From my profession [ ] Inheritance [ ] Self-developed properties [ ] Allowances [ ] other, please Specify 6. What is your basic income level, per month? [ ] Less than GH500 [ ] GH501- GH1,000 [ ] GH1001- GH1500 [ ]

GH1501- GH2000 [ ] Above GH2000

7. How many dependents do you have (family, friends, parents, others) 1[] 2[] 3[] 4[] 5[] 6 and above [ ] None [ ]

8. What is your biggest monthly expenditure? Food [ ] Clothing [ ] Loan amortization [ ] Housing and utilities [ ] Education [ ] Investment [ ] Other, please specify 9. What proportion of your monthly income do you save? 0-5% [ ] 6-15% [ ] 16-30% [ ] 31-50% [ ] above 50% [ ]

10. What type of housing arrangement do you have? Full ownership [ ] Rentals [ ] Family property [ ] others [ ]

11. Have you benefited from a mortgage scheme before? [ ] Yes [ ] No

12. If yes, for what purpose did you take the loan? [ ] Purchase of a house [ ] Completion of a house [ ] Construction of a house [ ] Improvement of existing house

[ ] Refinance of an earlier housing loan 13. If no, why? (tick any number deemed fit) Interest rate too high [ ] Huge money as down payment [ ] Discourages savings [ ] Repayment period too long [ ] 82 little

money for other engagements [ ]

Other, please Specify.. 14. Would you use a mortgage facility which advices an initial monthly commitment of about 40% of your monthly income? Yes [ ] No [ ]

15. Would you use a mortgage facility when monthly repayments are initially low but would increase over the mortgage term? Yes [ ] No [ ] 16. Would you opt for a mortgage facility which takes a particular percentage of your salary irrespective of income change? Yes [ ] No [ ] 17. Would you for a mortgage facility which takes fixed monthly repayment irrespective of inflation? Yes [ ] No [ ] 18. How would your priorities be in selecting a mortgage facility, Please select your best three (3) priorities? Select using 1, 2 ,3 and 4. Affordability Flexibility (Ease of payment) Accessibility (Smaller initial Amount) Measurable (Specific Monthly Payment) 19. What mortgage term would you opt for (years)? Below 10 [ ] 10-20 [ ] 20-30 [ ] Others [ ] [ ] Yes [] [] [] []

20. Were you satisfied with the general terms and conditions of the Mortgage loan? [ ] No If No, why........................................................................................................................ 21. Would you recommend mortgage as an option to prospective home owners? [ ] Yes [ ] No

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22. What measures would you suggest to improve the housing loan packages offered by financial Institution? Thank you for your time

APPENDIX B KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY

COLLEGE OF ARCHITECTURE AND PLANNING DEPARTMENT OF LAND ECONOMY

RESEARCH QUESTIONNAIRE FOR FINANCIAL INSTITUTIONS Dear Respondent, The researcher is a final year BSc Land Economy student conducting a research on the topic Assessing the suitable mortgage model in Ghana Case study of HFC Bank, Fidelity Bank, and Ghana Home Loans. YOU ARE ASSURED THAT ANY INFORMATION PROVIDED HEREIN IS FOR ACADEMIC PURPOSE AND WILL BE TREATED WITH THE STRICTEST

CONFIDENTIALITY. YOU ARE THEREFORE IMPLORED TO ANSWER THE QUESTIONS AS DETAILED AND ACCURATELY AS POSSIBLE. THANK YOU. Please complete this questionnaire by ticking () the applicable box or by providing the appropriate response in the spaces provided.

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1) What is the core business of your institution . 2) What are the aims and objectives of the institution ....... .

3) What form(s) of credit does your institution offer? i) Mortgage [ ] ii) SME Loans [ ] iii) Personal loans [ ] iv) others, [ ] Please specify..

4) Which type of mortgage does your institution originate? a) Primary [ ] b) Secondary [ ] c) both Primary and Secondary [ ]

5) What is/ are your source(s) of funding? i) Bank of Ghana [ ] ii) SSNIT [ ] institutions [ ] Others, please specify iii) foreign sources [ ] iv) Other local financial

6) What percentage of your total lending portfolio goes into housing loans? i) Less than10% [ ] ii) 10 20% [ ] iii) 20 50% [ ] iv) More than 50% [ ]

7) What was your borrowing rate for the following years? Year Source(s) of funding Borrowing rate 2009 1. 2010 1. 2011 1. 2012 1.

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2. 3.

2. 3.

2. 3.

2. 3.

8) What was the mortgage rates and for the following years? Year 2010 2011 2012 Rate

9) What are the main features of your housing loan schemes Maximum loan amount Maximum term (no. of years) allowed for repayment Interest rate Currency (local, foreign, or both) Repayment options (fixed or floating rate) Deposit required Maximum loan-to-value ratio Other(s).

10) Which of the category of borrowers form the largest component of your clients? i) Resident Ghanaians [ ] ii) Resident non Ghanaians [ ]

iii) Non-resident Ghanaian [ ] iv) others [ ] 11) What mortgage type(s) does your institution offer? i) Fixed rate [ ] ii) Adjustable rate [ ] iii) Graduated Payment [ ] Other(s), please specify. 86 iv) Indexed [ ]

Please specific the Particular Mortgage Model used 12) What factors inform your choice of mortgage types offered to clients? 13) Is every client at liberty to choose the loan term he/she prefers? Yes [ ] No [ ]

14) If no, what factors do you consider in deciding mortgage repayment periods?

15) What are your mortgage eligibility requirements? i) Be a customer [ ] iii) Be a salary worker [ ] ii) Be a civil/public worker iv) other (specify).....................................

16) Which income earning group(s) constitutes potential demand for your mortgage facility? i) Less than GH500 [ ] iv) GH1201- GH1500 [ ] ii) GH501- GH800 [ ] v) beyond GH1500 [ ] iii) GH801- GH1200 [ ]

17) What is the minimum down-payment borrowers are expected to contribute? i) 0% [ ] ii) 10% [ ] iii) 20% [ ] iv) 25% [ ] iv) other [ ]

18) What is the maximum payment-to-income ratio? i) 20% [ ] ii) 25% [ ] iii) 30% [ ] iv) 40% [ ] v) other [ ]

19) How much can one borrow? (Highest loan to value ratio) 87

20) What is the least amount that can qualify one for a mortgage and how much Will be the persons monthly contribution? (Payment to income ratio) Mortgage type qualifying income Monthly contribution

21) What is the rate of mortgage default? i) Very high [ ] ii) high [ ] iii) moderate [ ] iv) low [ ] v) very low [ ]

22) What has been the response of clients to mortgage loans? i) Excellent [ ] vi) very poor [ ] 23) What challenges do you face as an institution in dealings with mortgage? . ii) very good [ ] iii) good [ ] iv) fair [ ] v) poor [ ]

24) How do you plan to improve mortgage services? 88

25) What is the impact of statutory regulations on your institutions mortgage product offerings?

26) How do you think mortgages should be structured to ensure affordability for Borrowers and again maximize profit for the lending institutions?

THANK YOU FOR YOUR TIME!!!

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