MORTGAGES Copy

A house is the most expensive purchase of most people’s lives, mostly acquired with a bank loan or mortgage, and banking regulators set strict standards for banks and other lenders such as building societies and credit unions.

Home ownership rates vary widely across regions of the world. In south-eastern Europe, countries such as Romania and Slovakia have home ownership rates above 90%, while in Germany and Switzerland, many people are content to rent and home ownership rates are below 50%. Home ownership rates are in the 80-90% range in India, Vietnam, China and Indonesia.

In Africa, Egypt has a 76% ownership rate, Kenya is at 76%,  South Africa has 54%, while in Nigeria, the figures is close to 25%. In many countries with low home ownership rates and low uptake of mortgages, we find that there are many issues regarding land titles and registrations.  Across much of the world, we find home ownership rates of around 60% of the population.  

Loan-to-value limits 

Financial regulators set limits on the amount a person can borrow for a mortgage or home loan, depending on both the income of the borrower and the value of the property. In most cases, the lender requires the borrower to have a minimum deposit. For instance, a first-time buyer in Europe or Japan will typically need to have a minimum deposit of 10% of the value of the property. In Nigeria, a bank will typically require a 20% deposit. In the UK, new regulations designed to encourages property ownership will allow banks to offer up to 95% of the property value. 

At times, these limits can change. Prior to the financial crisis of 2007-08, lenders came up with new ways to grow their loan books, including dropping the minimum deposit for mortgages. Some banks began offering not only 100% mortgages which required no deposit, but some started offering mortgages above the 100% limit so that borrowers could also acquire furniture for the property.

Loan-to-income limits

Banks restrict mortgage borrowers to a limit related to their income. Typically this is around 3 to 3.5 times the borrower’s income. For example, at a limit of 3.5, a person earning $50,000 a year may be eligible for a mortgage of:

$50,000 x 3.5 = $175,000

Often a property is purchased by a couple. In this case, if both persons are employed, the bank may offer 3.5 times the combined income of the couple.  

Buy-to-let mortgages: A buy-to-let mortgage is offered to investors who want to acquire a property to rent out rather than live in. Buy to let mortgages are typically offered at the 70% to 80% loan-to-value range. Unlike personal mortgages, the parameters for buy-to-let mortgages are rental income from the property rather than personal income. Buy-to-let mortgages are popular with small investors who may have one or two properties.

Interest-only mortgages: These mortgages are primarily used by buy-to-let investors rather than those who want to buy their houses in order to live in them. With an interest-only mortgage, the investor pays back only the interest on the loan, with the principal amount payable in a lump sum. The investor will take out a pension policy or endowment policy at the start of the mortgage, and build up a fund which can then be used to repay the original amount. The investor may also choose to sell the house and repay the original amount.

Reverse mortgages: These are typically offered only to persons over a certain age who may have built up significant equity in their homes. In the US, the minimum age to receive a reverse mortgage is 62 years, while in the UK it is 55 years. A lender will assess the equity in the home and offer an income against that equity. The income may be as a lump sum, or a monthly payment.