KUGBEGA

The GPM for Housing Affordability: Prospects and Challenges

The Graduated Payment Mortgage as a panacea to housing affordability among Africas

middle class: Prospects and challenges. The case of Ghana.

Selorm Kobla Kugbega

Principal Researcher
ABS Centre for Land Investment and Research
Tema, Greater Accra Region
Ghana.

Abstract
Home ownership is a coveted dream of almost every individual. Unfortunately, most people are
not able to see this dream to realisation due to financial constraints. The importance of mortgage
products cannot be undermined since they have proven to be overly reliable in helping provide
decent housing for low and middle income groups in many countries.
Despite the overwhelming impact of mortgaging, some countries are unable to tap into the most
reassuring means of housing finance. African countries are no exception to this since their
financial markets are characterised by high and volatile interest rates, short to medium term
lending, mortgage credit deficiencies, embryonic capital markets and a host of other factors that
discourage mortgaging. The situation is aggravated in Ghana where Mortgage debt to GDP ratio
stands at 0.5%, making it one of the least developed markets worldwide with a wide variation from
the African average of 15.7% (CAHF, 2014:84). Mortgage pricing determinants form the core
problem of Ghanas low performing mortgage industry and the nature of the mortgage model
adopted for pricing has a long-term significant effect on effective mortgage demand.
The nature of the mortgage instrument acceptable for mortgaging varies from one country to the
other. In fact the socio-economic, political and cultural make-up of a country needs to be given
due consideration in adopting a suitable model for mortgage product offerings. This paper
understudies the potential of the Graduated Payment Mortgage in pricing and demand for
mortgage products. To achieve this, the study concentrates on middle income earners in Ghana
and examines their propensity to afford mortgage products characterised by graduated payments.
0

The study further employed quantitative and qualitative methods of data collection from both
primary and secondary sources and adopted purposive sampling techniques.
The researcher gathered during the study that the unattractive nature of the Ghanaian mortgage
market stems from a myriad of intertwined problems. Typical of these are low income levels, high
interest rates, unwarranted socio-cultural stigmas on borrowing, high risk of default, expensive
mortgage products and high incidental costs.
Regardless of the difficulties of mortgaging in Ghana however, the study reveals that many
prospective home owners are willing to accept cheaper mortgage finance products in lieu of
incremental development approaches to housing. They expressed particular interest in the
graduated payment model which allows for low initial repayments that increase at an agreed
percentage over the term of the mortgage loan. Unrealistic assumptions, unpredictable economic
trends, long term mortgage credit deficiencies and slow build-up of equity are the major
challenges that were identified as capable of stifling the success of graduated payment mortgages
in Ghana.
Keywords: mortgage, equity, affordability, housing, graduated payment, fixed rate, housing
deficit, securitisation, Mortgage Backed Securities

INTRODUCTION
Ghana like many emerging economies is beset with acute housing shortages. The Ghana Statistical
Service (2012) estimates the housing stock deficit to be about 1,600,000 units. In view of this
problem, CAHF (2014:85) noted that efforts towards solving the housing problem will require the
completion of half a million new rooms per annum or 3.8 new rooms per minute of every working
day for the next 10 years. With annual housing demand at 100,000 units and supply at 40,000
units, the housing deficit situation is sure to aggravate. The most common means of housing supply
in Ghana is by incremental development which has completion times of between 4 to 15 years.
Strategies geared towards solving the housing problem will require the quadrupling of current
yearly supply for 10 consecutive years.

In contributing towards resolving this canker, government and its allied public sector institutions
have over the years made direct capital investments that saw the development of housing estates
and flats across the country. Centre for Housing Finance (CHF) International (2004) however
revealed the gross failure of government in housing provision by concluding that past and current
direct intervention efforts by government and other stakeholders in the housing market have failed
to reach middle and low income target groups or meet housing requirements. With direct
governmental efforts proving futile, incremental development impeded by its slow nature, volatile
prices of building materials, associated springing up of informal settlements and home ownership
rates hovering consistently between from 27% and 32% (CAHF,2014), there arises the need for
housing finance mechanisms to salvage the situation.
Housing finance plays an important role in the World Banks overall financial sector strategy and
is clearly and inextricably linked to the overarching mission of reducing poverty and improving
lives (IFC, 2008). The need for housing finance is further asserted by HFC (2007) when they
concluded that without financing options, the ownership of formal housing will be beyond the
reach of 95% of the population whilst only 60% can afford a house with financing arrangements.
This leaves only 5% of the population who are capable of financing housing without any form of
assistance and 35% who may never own a house in their lifetime. The use of mortgage finance has
proven worthy of emulation and indispensable in resolving housing supply (usually liquidity
problems) and demand (qualification and amortisation constraints) needs across the globe.
2

Mortgaging is essentially the bedrock on which most developed countries including Britain and
USA build their economies. However, the success of mortgaging is largely dependent on its nature
and affordability for target groups. Housing affordability is measured in terms of the ability of
households to have access to adequate shelter and still be able to afford other basic needs including
food and clothing. IMFG (2013) summarizes housing to be unaffordable when financial
commitments take 40% or more of net household income.

In Ghana today, most middle income households receive monthly incomes of between GH1200
($343) to GH2,000 ($572) but such amounts are usually inadequate in securing home mortgage
loans giving regard to the average household size, dependency ratios and the cost of living. The
unattractive nature of the Ghanaian mortgage market is blamed on the high interest rates, demand
for huge down payments, unstable inflationary index, mortgage credit deficiencies, unsuitable
mortgage products and extra procedural costs to be borne as a consequence of the securing of a
mortgage instrument (Boamah, 2010). Paramount among the mortgage pricing indicators is the
nature of mortgage model adopted and its ability to mitigate lender and borrower risk: its unique
characteristics can boost or render a promising mortgage industry ineffective (Lea, 2010).

In Ghana, the fixed rate fixed payment mortgage model is predominantly used by lending
institutions but it renders product offerings unattractive and expensive. This model by virtue of its
pricing methodology essentially shifts both borrower and lender risks to the mortgagor and further
concentrates the burden of repayment in the formative years of the mortgage term. It is most
suitable for stable economies with very low lending and mortgage origination rates. In volatile
economies such as Ghana where base rates are as high as 22% (BoG, 2015), this model discourages
borrowing through loan qualification constraints. Resultantly, CAHF (2014) and Grant (2009)
indicated that only three percent of households can afford monthly mortgage payments for the least
priced house of US$25,000. Without making any down payments, this translates into monthly
repayments of US$300 (GH1,050) and will require prospective mortgagors to have collective
household income of about $750 (GH2,625). With middle income household salaries averaging
GH1,500 it is impossible for prospective mortgagors to qualify for loans without exceeding the
allowed loan payment to income ratio of 40%.
3

Clearly, the fixed rate fixed payment mortgage model is expensive and incapable of housing the
average middle income household in the least priced house hence, the need for a flexible mortgage
model that can remove the complexities of fixed rate fixed payment mortgages while
simultaneously safeguarding the positions of both lending institutions (through improving liquidity
and reducing default rates) and mortgagors (through improving affordability). The graduated
payment mortgage which is characterised by improved mortgage qualification and lower initial
repayments that increase over the mortgage term has been employed in many developed economies
including USA to improve home ownership. Studies by Lea (2009) generalised the workability of
different mortgage models in emerging economies while scholars including Boamah (2009, 2010)
and Ayitey et al (2010) concentrated on primary mortgage lending, housing affordability and
feasibility of secondary mortgaging. Little has been done on analysis of repayment models as an
integral component of mortgage pricing and testing the performance of affordable models in
improving housing affordability.
The study therefore understudies the Graduated Payment Mortgage as an affordable mortgage
model and examines its propensity to improve mortgage market development and home
ownership. The ensuing sections of the paper discuss selected mortgage types, Ghanas mortgage
market, mortgage affordability and feasibility of the GPM in Ghana.

Importance of Housing Finance

Housing finance plays a critical role in the development process by supporting housing markets,
while strengthening the financial sector and contributing to overall economic growth. With strong
housing finance 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 Markets serve as
a catalyst for economic productivity by contributing to land and labour markets, building materials,
transportations systems, construction, among others (IFC, 2008). Chiquier et al (2004) and Renaud
(1999) support the potential of housing finance systems by recognizing that they contribute
significantly to job creation, wealth creation and distribution, social cohesion, economic growth,
urban development, home ownership and financial returns. The failure to improve housing
conditions and markets can impede economic development, contribute to poverty and social
4

isolation, create negative externalities in development, and destabilize the economy (Lea,
2010).
A vibrant housing finance system can provide essential benefits which may come in the
form of improved living conditions (higher standard of living), improved infrastructure, increased
propensity to save, capital provision for other investment vehicles, among others. Housing
finance also contributes to social stability by enabling households to purchase an asset
which will represent their largest single investment; because, personal residences account
for 75% to 90% of household wealth in emerging economies, which amounts to 3 to 6 times
their annual income (IFC, 2008).

Augmenting Housing Finance and Economic Development: Mortgage as the Panacea

Among the housing finance alternatives, mortgage securities are the vehicle to tap capital markets
for funds for housing and can improve the accessibility and affordability of housing whiles
allowing lenders to better manage the complex risks of housing finance (Renaud, 2005: World
Bank, 2008). The mortgage market is a major contributor to development and GDP in many
economies because, if the economy grows at a given rate, the housing sector has the capacity to
grow at 1.4 times that rate and generate 3.2 million new jobs over a decade (World Bank, 2008).
These assertions are grounded in the residential mortgage debt to G.D.P ratios 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) (IUHF,2013:2014). Conversely, developing countries have their residential mortgage
debt to G.D.P ratios as: Kenya (3.7%), Nigeria (<1%), Rwanda (2.6%) and Ghana (0.5%). (CAHF,
2013: 2014).

Mortgage debt to GDP Ratio and Home Ownership

Rates
120
100
80
60
40
20
0

(Mortgage Debt) 2012

home ownership rate(2012)

Source: IUHF Country Factsheets (2013: 2014), IMF Global Stability Report (2014), CAHF
(2013: 2014)

The ratio of Mortgage Debt Outstanding (MDO) to Gross Domestic Product (GDP) for any
economy is an important proxy for measuring mortgage market development. Mortgage debt and
housing markets through secondary mortgage markets and securitization, support the efficient
functioning of domestic and international financial markets by serving as a long term and
continuous capital source. With the development of mortgage markets therefore, emerging
economies will be able to release monies locked up in housing development as popularly described
by Desoto (2000) as dead capital. Ghana through effective mortgage markets can harness dead
capital and benefit from its redistributive advantage to develop the private sector and prepare it for
its much awaited take-off as the engine of growth. Ghanas mortgage market is still embryonic,
with only a 0.5% mortgage debt to GDP ratio as of 2014 (CAHF, 2014). The major players: HFC
Bank, Ghana Home Loans, have a total mortgage lending portfolio of around US$180 million and
about 6000 mortgagors.
The diagram also shows mortgaging as that the key driver of increased home ownership rates in
developed economies because the countries with high mortgage to GDP ratios have corresponding
high home ownership rates. The reverse is however the case in the developing countries, which
display discouraging mortgage debt to GDP ratios but plausible home ownership rates. Mortgage

markets undoubtedly hold the potential of contributing immensely to economic and social
reorientation.

Mortgage Models: A Focus on 2 major Fixed Rate Mortgage Types

As noted earlier, mortgage models play a paramount role in affordability or otherwise of mortgage
product offerings. Mortgages are basically classified according to the characteristics of their
amortisation models, frequency of repayment, interest rate and equity accumulated in a property1.
To this extent, mortgage models are largely classified as either fixed or variable. For the purposes
of this study however theres a primary focus on two Fixed Rate models with different amortisation
characteristics: the Fixed Rate Fixed Payment model (conventional model in Ghana) and the
Graduated Payment Model because they constitute the major objects of the study.

Fixed Rate Fixed Payment Mortgage (FRFP)

Fixed rate fixed payment mortgages have been the mainstay of the home loan industry for decades
because the security it offers has never lost its appeal in the face of fluctuated loan-to-value ratios
and interest rates increments (Weintraub, 2011). In brief, the FRFP mortgage type is characterised
by a fixed contract rate and a fixed periodic payment schedule over a fixed loan term. This
instrument is highly volatile during inflation periods with its effect being diminishing values of
pre-proposed periodic payments (tilt effect). Building a system around the FRFP mortgage
therefore requires a secondary mortgage market which can help absorb inflationary risks (Wachter
and Worley, 2010). Lea (2009) opined that FRFP mortgages were suitable for economies with low
and stable inflation rates. Because the real value of fixed payments decline with inflation, it is
necessary in an inflationary environment to increase the initial payments inordinately relative to
income in order to maintain a given present value when the payments are discounted at any given
real interest rate (ibid). This proposition invariably can be blamed for the high interest rates
charged on fixed rate mortgages in volatile economies. Developing countries are therefore the
most affected as exemplified by Ghanas cedi loans attracting an average rate of 30% (GHL, 2014)
whilst the USA boasts of a rate of 3.5% for 30 year mortgages as of April 2015 (Reuters

Refer to our paper titled A Discussion of major mortgage models: Emphasis on mathematical make-up, strengths
and weaknesses for further elucidation on varied mortgage models.

2015). The FRFP increases the real cost of mortgages and makes qualification difficult in volatile
economies by pricing rates above prevailing market rates to withstand economic shocks that may
affect the value of repayments or increase default risks. Inflation causes a tilt in the stream of
mortgage payments towards the early years of the mortgage and culminates as a shift in the burden
of the real cost of home ownership towards the initial years of the mortgage (Hendershott,
1997). FRFP mortgages do not receive much patronage in Ghana because they are expensive.
(See appendix A for mathematical illustration)
Graduated Payment / Deferred Instalment Mortgage
GPMs are fixed rate mortgages with flexible amortisation or payment terms that concentrate loan
repayments in the mid and later years instead of the early years as is the case of FRFP mortgages.
They are however also geared towards amortising the same lump sum that FRFP mortgages seek
to do. A Graduated Payment Mortgage (GPM) loan usually typifies a loan where the scheduled
repayments begin at a level lower than that of a comparable FRFP mortgage and increases at agreed
intervals and percentages throughout the loan term. This mortgage type assumes that the borrower
will be better-off or his income will increase progressively with economic changes towards the
latter years of the mortgage term (Philips & Vanderhoff,, 1994 ). Hence, it is a loan given in
anticipation of future higher incomes for the borrower. The quid pro quo 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 mid and later years (Alm and Follian, 1984). Morris, (2007) also remarked that
the GPM should be made available only to the young adult whose income can reasonably be
expected to rise substantially in the future. 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 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
repayments on a GPM will have the same time path as would a standard FRFP mortgage contract
(Bruekner & Follain, 1988), 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
(Alm & Follian, 1984).
8

The rising stream of payments implies greater default risk because of the slow accumulation of
equity and the heavy payment burden for the borrower in the mid and later years of the mortgage
term.
Any deferred interest as a result of lower initial payments is added to the remaining balance
of the loan in a financial phenomenon called negative amortisation2. As a result of this
arrangement, the amortization of GPMs is slower than a FRFP mortgage. Factually, GPMs have
been recommended for use primarily in periods of inflation where salaries are among other things
expected to increase continuously. GPMs provide an innovative solution to the affordability
problem of first-time home buyers who cannot qualify for standard FRFP mortgages (Bruekner,
& Follain, 1988).

Demerits
GPMs do not only build a borrowers equity in the home slowly but its negative amortisation
feature can be an impediment to lending for home finance corporations that report income on an
accrual basis because it effectively increases their tax liability (Philips & Vanderhoff,, 1994 ). The
GPM is also based on the assumption that the borrower will be progressively better off towards
the end of the mortgage term but this is not always the case. Some borrowers may experience an
increase in expenditure during the mortgage term that will constrain their amortisation ability.
Because equity does not build quickly with a G.P.M, the borrower may be required to make larger
down payments (ibid) unless lenders believe property values will rise at a rate that can offset the
effects of negative amortization (Chomsisengphet, 2006). The success of GPMs is inextricably
linked to the efficiency of finance credit institutions including secondary mortgage markets and
pension funds that can serve as a long term continuous capital source for the primary mortgage
market. This is because the GPM locks up capital and expected interest in the formative years of
the mortgage term thereby posing liquidity threats for lending institutions who are expectant of
quick returns upon which they can rely to originate further loans. (For mathematical illustration,
see appendix B)

Negative amortisation occurs when the outstanding balance on a loan increases usually beyond fixed payment
loans because the periodic repayments made is less than the expected interest per period

Mortgage Affordability in Ghana

With an average middle class households net income at GH1,500($429) it is clear that majority
cannot qualify for the cheapest mortgage loan in Ghana (CAHF, 2014). The effect of this is the
out pricing of potential mortgagors from the housing finance market. Undeniably, the low-income
levels in the country would continue to engender low mortgage patronage. Low income levels,
high mortgage rates, unsuitable mortgage products and poor access to credit have been cited as the
major barriers to mortgage affordability.
Credit deficiency and liquidity problems have worsened affordability by encouraging the
dollarization of loans. This dollarization is further compounded by the volatility of the Cedi hence
the need for mortgagees to hedge loans by indexing them against the dollar. Resultantly, most
newly originated loans since 2012 have been dollarized. On a positive note however, the
dollarization allows lenders to enjoy lower interest rates (12.5%-13.5% as of July 2015) as opposed
to cedi loans that attract between 28%-32% interest rates (GHL, 2014). There arises a high
possibility of default however for most mortgagors since most receive salaries in cedis and would
need more cedis to pay off the same monthly dollarized repayment when the economy is
underperforming. Surprisingly, GHL (2014) notes that default rates are low because there is a more
than a proportionate average yearly increase in salaries over average inflation.

10

Mortgage Affordability Pyramid

100%

The cheapest formal housing unit of 66m2 seated on a

> $10.00/day

167m2

$4 $10 per day

plot

of

land

costs

about

US$25,000

(GH100,000), and requires monthly repayments of

$300(GH1,200) for 20 years is still too expensive for
75%

even the formally employed since it requires qualifying

$2 $4 per day

income of $750 (GH3,000)

Resultantly, only persons earning more than $10 per day
can access mortgage loans.

50%
$1.25 $2 per day

25%

< $1.25per day

0%

Source: Adapted from CAHF (2014)

Illustration on FRFP Mortgage Loans

With the cheapest basic unit of $25,000 (GH87,500), the monthly commitments required by
mortgage lending institutions for a 20 year mortgage term arrived at using the formulae =

[(1)]
Where,
A= loan amount

I= interest rate per annum

Pv (present value factor) = (1+i) ^-n

N= number of years

n= number of repayment periods, (N12)

K= Monthly repayment amount

11

i= interest rate per month (12)

Mortgage Affordability per Institution

Institutions

Loan type

Ghana Home FRFP (US$)

Loans (GHL)
FRFP (GH)
FRFP (US$)
With 100% LTV
H.F.C bank

Fidelity Bank

Loan amount and LTV3

0.75 $25,000 =$18,700

0.75 GH87,500
= GH65,625
1 $25,000= $25,000

Interest rate Monthly

Qualifying
(per annum)
commitments
salary.
(payment to income
ratio4 of 40%)
13.5%
$226 (GH790)
$565
(GH1,971)
30%
GH1,645
GH4,113
13.5%

$302 (GH1,056)

$755
(GH2643)
$623 or
GH2,181
GH4,387

FRFP (US$)

0.8$25,000 =$20,000

14%

$249 (GH871.5)

FRFP (GH)

0.8 GH48,000
= GH70,000

30%

GH1,755

FRFP (US$)

0.8$30,000 =$24,000

12.5%

$227 (GH795)

29.5%

GH1,726

$568
(GH1,986)
GH4,314

28%

GH1,742

GH4,355

FRFP (GH)

0.8 GH87,500
= GH70,000
Cal Bank
Fixed rate
0.85 GH48000
= GH74,375
Source: Authors Field Survey, June 2015
(Adapted

from

www.Ghanaweb.com:

www.Fidelity

Bank.com.gh:

Exchange

Rate:US$1=GH3.5, July 2015)

In an ideal situation where 20% down payment is required, the cheapest housing unit of $25,000
to be amortised over a 20 year period with an average dollar rate of 13%, requires $234 (GH820)
monthly repayments. This however requires a qualifying income of $585 (GH2,048). Clearly, the
average household income of GH1,500 under the assumption that prospective mortgagors are
willing to commit up to 40% of their monthly incomes towards housing isnt enough to help
households access a mortgage product. Lingering in the background for upper segment middle
income earners who manage to qualify slightly is the huge down payments required and the cost
3

Loan to Value Ratio ( LTV) refers to the ratio of loan advanced b lending institutions to the value of mortgaged

property. Mathematically, LTV=

Payment to Income Ratio refers to the percentage of a mortgagors monthly mortgage repayments to monthly
income. In Ghana, a total of 60% is allowed for 2 or more loans and 40% for single loans.

12

of incidental fees (legal, valuation, loan processing fees). Housing affordability is relative,
however when using the allowed legal payment to income ratio as a reference point, only
households with a monthly income of $600 (GH2,100) can qualify for a loan. This leaves such
households with no buffer for economic shocks when the cedi depreciates thereby requiring them
to pay more cedis for the same fixed monthly dollar payment. Ideally, lending institutions will
require a 10% salary buffer on the qualifying income in a bid to reduce default rates when
economic shocks cause the cedi to underperform. Resultantly, lenders will only be willing to offer
mortgages on the least priced house to households that earn incomes of at least $660 (GH2,310)
per month since such households can support buffer accounts hence are more capable of meeting
repayment obligations when the cedi to dollar exchange rate is unfavourable. With these
qualification constraints prevalent, it is apparent that fixed rate fixed payment mortgages are
unaffordable hence the continued preference for incremental development.
Mortgage Affordability for GPMs or Deferred Instalment Mortgages
This mortgage type just like the FRFP mortgage does not allow for the reduction of down payments
nor the waiving off of some incidental costs hence inherits the problems of affordability emanating
from huge down payments and exorbitant incidental costs. The main attribute of the GPM is its
ability to allow for lower initial payments with the assumption that incomes and living conditions
will be better with every passing year of the mortgage term. With GPMs dependent on year-onyear salary increment, it is imperative to note that public sector base pay rates which normally
determine the quantum of salary increments, increase at an average rate of 15% per annum (Fair
Wages and Salaries Commission, 2014: GHL, 2013). Its effect on net salaries is usually an average
of 8% but dwindles towards 1% for bigger salaries whose bonus components usually outweigh the
base pay. For GPMs, this expected yearly percentage increase in salaries would help establish the
year on year or periodic increase in amortisation payments targeted at amortising the maturity
value of the loan.

Years

Least
Expected Least
Monthly
Income Annual Income
percentage increase in Appreciation (without recourse to GH
salaries
promotions, better paying jobs)
GH
8%
1,500
18,000
13

8%
1,620
2
8%
1,750
3
8%
1,890
4
6%
2,003
5
6%
2,123
6
6%
2,251
7
6%
2,386
8
4%
2,481
9
4%
2,580
10
4%
2,683
11
4%
2,791
12
2%
2,847
13
2%
2,904
14
2%
2,962
15
2%
3,021
16
1%
3,051
17
1%
3,082
18
1%
3,113
19
1%
3,144
20
Source: Authors Field Survey, June 2015

19,440
21,000
22,680
24,036
25,476
27,012
28,632
29,772
30,960
32196
33,492
34,164
34,848
35,544
36,252
36,612
36,984
37,356
37,728

The table shows the expected income for 20 years for a middle income household with a net salary
of GH1500. The analysis is devoid of probable promotions or better paying jobs that cetaris
paribus come with experience. Hypothetically therefore, if a households earning capacity is only
increased by the normal accepted yearly percentage increase in base pay over inflation, that
household will have only doubled their income in 20 years. The quantum of change in salaries
reduces over the years based on the assumption that bigger salaries have a huge bonus component
such that a percentage increase in base pay will have little effect on a total salary whose bonus
component is 50% or more of the salary.

From the analysis on the conventional mortgage types in Ghana, it is realised that the future value
of a $20,000 (GH70,000) loan over a 20 year period at an average 13% mortgage rate stands at
about GH196,560 ($56,1605). With periodic quantum increment in repayments, the amortization
schedule of the loan could be as follows.
5

The total amount payable on the $20,000 loan which requires $234 monthly repayment per month for 20
years=$56160

14

Years

Monthly
Dollar
payment in Equivalent
GH
of
repayments

Annual
Value GH

1
400
114
4,800
2
480
137
5,760
3
576
165
6912
4
634
181
7608
5
697
199
8364
6
767
219
9204
7
821
235
9852
8
870
249
10440
9
870
249
10440
10
887
253
10664
11
904
258
10848
12
942
269
11304
13
942
269
11304
14
942
269
11304
15
942
269
11304
16
942
269
11304
17
942
269
11304
18
942
269
11304
19
942
269
11304
20
942
269
11304
Total
196,608
Source: Authors Field Survey, June 2015

Qualifying Net
Income
in
GH( 40% of
income)

Dollar
Equivalent
of
qualifying
income

Least
Expected
Net
Monthly
Income

1,000
1,200
1,440
1,585
1,743
1918
2,052
2,175
2,175
2,218
2,260
2,355
2,355
2,355
2,355
2,355
2,355
2,355
2,355
2,355

286
343
412
453
498
548
586
622
622
634
646
673
673
673
673
673
673
673
673
673

1,500
1,620
1,750
1,890
2,003
2,123
2,251
2,386
2,481
2,580
2,683
2,791
2,847
2,904
2,962
3,021
3,051
3,082
3,113
3,144

With the repayment pattern shown in the table, households with net income of between GH1,200
to GH1,500 are more than qualified for a mortgage. They will be able to easily pay off a loan of
$20,000 for the least priced house. The above analysis is done without recourse to the need for a
buffer account to absorb exchange rate differentials. Since loans are dollar indexed, the cedi to
dollar exchange rate needs to be examined to reveal how sustainable a buffer account can be in
supporting loan amortization. The graph below shows currency performance in the worst
depreciation year of the GH cedi.

15

C E D I TO $ 1 D O L L A R E XC H A N G E R AT E : J U N E 2 0 1 4 - J U N E 2 0 1 5
5
4.5

4.42

4.3

4
3.66

3.5

3.83
3.65

3.5

3.22
3

3.96

3.2

3.21

3.22

3.26

3.02

Max=$1: GH4.42
Avg=$1: GH3.58
Min=$1: GH3.02

2.5
2
1.5
1
0.5
0
Jun-14

Jul-14

Aug-14 Sep-14

Oct-14 Nov-14 Dec-14

Jan-15

Feb-15 Mar-15 Apr-15 May-15 Jun-15

Source: Authors Field Survey, June 2015

The graph shows the continuously fluctuating dollar to cedi exchange rates. The difference
between the current exchange rate and the maximum rate is 22% depreciation. Even though
projections show that the cedi will appreciate towards an exchange of about $1: GH2.5 by
December 2015, this analysis is made on the assumption that the rate worsens by 22% to about the
highest exchange experienced as soon as the mortgage is originated and remains so over the 20
year mortgage term.

16

The table below therefore shows mortgage repayments with a buffer account to absorb the effects of
currency depreciation.
years

Annual
Repayments
Value
GH
GH

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

400
480
576
634
697
767
821
870
870
887
904
942
942
942
942
942
942
942
942
942

Total

Current
Cedi Depreciation
Dollar depreciation Buffer
equivalent
to needed
($1:GH3.5) ($1:GH4.28)
4800
114.2857 490.28
1083.4
5760
137.1429 586.9714
1283.657
6912

164.5714 704.3657

1540.389

7608

181.1429 775.2914

1695.497

8364

199.1429 852.3314

1863.977

9204

219.1429 937.9314

2051.177

9852

234.5714 1003.966

2195.589

10440

248.5714 1063.886

2326.629

10440

248.5714 1063.886

2326.629

10644

253.4286 1084.674

2372.091

10848

258.2857 1105.463

2417.554

11304

269.1429 1151.931

2519.177

11304

269.1429 1151.931

2519.177

11304

269.1429 1151.931

2519.177

11304

269.1429 1151.931

2519.177

11304

269.1429 1151.931

2519.177

11304

269.1429 1151.931

2519.177

11304

269.1429 1151.931

2519.177

11304

269.1429 1151.931

2519.177

11304

269.1429 1151.931

2519.177

Payment
Buffer Account
Least
to
(actual loan
Expected
income
repaymentsNet
(at
40%)
payment
to income)
income
600
2400
1,500
648
2016
1,620
700
1488
1,750
756
1464
1,890
801.2
1250.4
2,003
849.2
986.4
2,123
900.4
952.8
2,251
954.4
1012.8
2,386
992.4
1468.8
2,481
1032
1740
2,580
1073.2
2030.4
2,683
1116.4
2092.8
2,791
1138.8
2361.6
2,847
1161.6
2635.2
2,904
1184.8
2913.6
2,962
1208.4
3196.8
3,021
1220.4
3340.8
3,051
1232.8
3489.6
3,082
1245.2
3638.4
3,113
1257.6
3787.2
3,144

43,829.21

44,265.6

196608

Source: Authors Field Survey, June 2015

The table shows probable affordability of a mortgage product using the GPM even during
economic downturns equivalent to 22% depreciation of the cedi (from $1:GH3.5 to $1$1:GH4.28)
this allowance is far beyond the average depreciation in the worst currency performance year in
Ghana. The assumption here therefore is that if the cedi depreciates by 22% immediately the
mortgage is originated for the total duration of the loan, the buffer account which refers to extra
payments made in anticipation of currency depreciation will prevent default and unscheduled
17

negative amortization. Beyond this depreciation level, the model is unsustainable. For every given
year, the assumption is that mortgagors are willing to commit 40% of their monthly income to
housing. However this model by virtue of its repayment structure in all the years requires them to
make payments less than the stipulated 40% payment to income. The difference between the actual
payments made and payments that could have been made goes into a buffer account to mitigate
the effects of currency depreciation. Where the buffer account maintains a positive balance over
depreciation deductions, the remaining balance can be used to offset loan balances. The converse
will however require a renegotiation between mortgagors and mortgagees for an extra repayment
term. All things being equal however, it is expected that household incomes will rise beyond the
least expected incomes and the cedi will appreciate against the dollar or at least not maintain a
22% depreciation for 20 years. The buffer account may further be handy in supplementing
repayments in instances where the actual income of a mortgagor is lesser than the projected income
that informed the amortisation schedule.
Both fixed rate fixed payment and the GPM are able to amortize the loan by the end of the mortgage
term however the GPM seems affordable. It removes qualification constraints and the burden of
repayment from the formative years of the mortgage term to the mid and later years. From the
analysis so far, it is realised that the GPM reduces qualification constraints hence allowing
households who hither to needed qualifying net income of GH2,310 for a $20,000 loan, to obtain
such loans with net income of GH1,500 subject to a commitment to progressively increase
repayment amounts in accordance with an agreed amortisation schedule.
Perceived Challenges of Using GPMs
The GPM despite its relative affordability and ability to improve mortgage qualification is fraught
with the following problems.
(a) Locking up of capital needed for short term investments: The burden of the loan is shifted
to the mid and later years of the mortgage term thereby locking up capital and creating liquidity
problems for lending institutions. This problem is aggravated by the absence of secondary
mortgage markets and long term access to finance. The low initial payments may be a disincentive
for lending institutions that depend largely on the capital inflow from repayments for their
operations.
18

(b) Unrealistic assumptions: There exists an imminent difficulty in predicting future income and
the assumption that a quantum change in yearly incomes will make people better off is
unsustainable. The purchasing power of money could reduce though a huge quantum change may
have been realised. There is therefore no certainty that the mortgage type will continue to ensure
affordability throughout the mortgage term. The assumptions of annual income increment and
therefore an increment in amortisation amounts may be defeated by changing economic, social
and political conditions. The analysis further assumes that households are willing and ready to
make the required average down payment of 20% of the property value and contribute up to 40%
of their monthly incomes towards a mortgage facility. This assumption is however unreliable
because it is relative and cannot be generalised.
(c) High risk factor: The mortgage type may also be too risky to employ in Ghana because of the
high possibility of default owing to increasing repayment amounts during the mortgage term.
There is also the risk of possible loss of value of amortisation payments possibly due to economic
downturns like the case of Zimbabwe in 2008-9, political upheavals, among others.
(d) Slow build-up of equity: A mortgagors build-up of equity in a mortgaged property is
relatively slow hence true ownership rights over the property are not exercised early enough. In
the incidence of a foreclosure in the early years of the mortgage term, the mortgagor may end up
being disappointed as he or she is sure to receive pittance as equity accumulated unless the property
is located in a region characterised by high property appreciation rates.
(e) Reaction of mortgagors: Some prospective mortgagors do not like the idea of loans usually
due to past experiences or experiences of close associates. They found it even more unacceptable
to have a loan whose repayment amounts increases progressively during the loan term. This sociocultural attitude is a disincentive to general mortgage market development.

Summary of Findings
A careful assessment of current mortgage types employed in Ghana reveals that mortgages are
unaffordable to both low and middle class income earners. The unaffordability of mortgages is a
product of unreasonably high interest rates, huge down payments, incidental fees, low income

19

levels, mortgage underwriting6 constraints, among others. The analysis further revealed that the
GPM reduces the strain on incomes and improves mortgage qualification better than the
conventional fixed rate fixed payment mortgage.
Although, the GPM from the analysis in is an affordability sensitive model, its main disadvantage
lies in the deprivation of lending institutions of funds needed for investment in other portfolios
because capital is locked up and only released in the mid and later stages of the mortgage term.
The fixed rate fixed payment mortgage type however makes affordability at the initial stages
difficult but through its tilted loan repayment feature, makes sure capital invested is quickly
released at the early stages of the mortgage term for other investments. The GPM exhibits great
potential for the development of Ghanas mortgage market if lending institutions can find
alternative capital sources that will prevent them from being over expectant of a return on and
return of capital in the early years of the loan term.
Recommendations
The following recommendations are indispensable to the success of the GPM in Ghana and overall
development of the mortgage market.
(a) Access to long term credit: Theres the need for a secondary mortgage market to solve liquidity
problems of primary lenders, remove long-term credit deficiencies, support securitization7, mortgage
switching8 and ultimately support the development of a vibrant housing market.

(b) Sustained Economic Stability

There is the need for government to concentrate on improving economic indicators such as the
Cedis trading position against the major international trading currencies, inflation rates, consumer
price index, income levels, among others. With these variables improved and the economy
stable, investment in the mortgage market would be improved.
(c) Flexible Mortgage Lending Conditions

Mortgage underwriting refers to the totality of processes that lenders use to determine the risk of offering a
mortgage loan to a specific borrower. It is usually based on credit worthiness, capacity to service loan and
acceptable collateral.
7
Negative amortisation occurs when mortgagors make payments less than the interest requirement for a specific
payment period hence have the difference carried on to subsequent payment periods.

20

In improving affordability also, there arises the need to reduce the conditions associated
with mortgage lending. Incidental costs should either be reduced or an option given for such
amounts to be added to the loan and amortized together with it. Alternatively, home savings accounts
can be opened for qualified prospective mortgagors to contribute towards the cost of down payments
and incidental fees.

(d) Development of Affordable Homes to Suit Local Needs

It has been noticed that housing units supplied by real estate firms are mostly tailored at
high income earners. The development of detached and semidetached units in prime areas is
unsuitable for supporting a proposed inexpensive housing finance industry because ultimately, the
value of loans granted is dependent on property values. Development of flats and condominiums
as seen in the examples of the United States of America and SSNIT in Ghana can increase the
supply of affordable housing to support mortgaging by the middle class.
(e) Most Suitable Target Group for the GPM
Due to the characteristic of increasing repayment amounts over the mortgage term, it is advised
that the GPM is targeted at young professionals that exhibit a reasonably foreseeable potential of
professional progression supported by salary increment. This would help reduce the possibility
of default.

Conclusion
The main problem with mortgage product offerings in Ghana has been identified as low
affordability levels and the current mortgage types offered are not making mortgages any less
affordable. 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. The
Deferred Installment or Graduated Payment mortgage model has upon analysis proven to be
sensitive to affordability constraints and is sure to increase mortgage market participation. The
success of GPMs reinforces hope in reducing the bizarre housing deficit problems that the country
is experiencing. Despite its propensity to improve mortgage industry activity, GPMs may be faced
with conditions including poor credit rating and information, economic downturns and low salary
appreciation that can stifle its implementation.

21

Finally, the adoption of GPMs as the mortgage model suitable for housing middle income earners
in emerging economies is conditional on the development of a vibrant capital market, economic
stability, dependable credit information systems, availability of long-term funding options
(secondary mortgage market, pension funds) and housing developments that suit local needs.

22

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25

APPENDICES
APPENDIX A: FIXED RATE FIXED PAYMENT MORTGAGE TYPE
Mathematical Illustration
Given a property purchase price of $ 50,000 and a fixed rate of 8% p.a compounding, whiles
also considering a 20% down payment and a 10 year term, then,
Loan Amount=$40,000

Formulae= = [()]
Where,
K= Monthly repayment amount
A= loan amount
I= interest rate per annum
i= interest rate per month (

Pv (present value factor) = (1+i) ^-n

N= number of years
n= number of repayment periods, (N12)
Periodic (monthly) payment amounts= $40,000[

.
(+.)^

= $485
The borrower is expected to make a monthly commitment of $485 and this will
culminate as $5,820 per annum and $58,200 maturity value.

26

APPENDIX B: GRADUATED PAYMENT MORTGAGE

Mathematical Illustration
Considering the maturity value of a 6 year loan to be $50,000 and an agreed yearly
graduation of 5% on an initial monthly repayment of $200, the amount payable per
graduation periods will be;
First year=$200
Graduation period 1(2nd year)= $200(1.05) =$210
Graduation period 2(3rd year)= $210(1.05) = $220.5
Graduation period 3(4th year)= $220.5(1.05) = $231.525
Graduation period 4(5th year)=$231.525(1.05) =$243.10
Graduation period 5(6th year)=$243.10(1.05) =$255.2

27