Building a Dream Home: Could You Do It Without a Mortgage Loan?  

residential building in Kigali

Ten years ago, the world almost turned dark. It was hit by a financial crisis – the worst since the world’s Great Depression of 1929.

At the time, people especially in the United States of America and Europe, had surrendered their whole lives to banks.

They were simply fed, transported, sheltered and walked on credit. The banks – despite suffering credit setbacks, had taken them as slaves.

Those who had secured loans such as mortgages had declared themselves incapable to service them . Some remortgaged.

As a result, the crisis saw housing prices excruciatingly fall down. The world went into recession.

One of the signs of the crisis emerged in 2006 when housing prices started to fall. Banks had allowed people to take out loans for 100 percent or more of the value of their new homes.

In Rwanda, the government has been smartly growing its mortgage book – despite Rwandans claiming financial institutions still offer mortgage financing at harsh interest rates.

For instance, almost all mortgages are issued at an interest rate that is in the region of between 16% and 19%.

To lower the burden, government in 2017 approved its $150 million fund to support affordable housing projects, and the funding would provide mortgage loans with as low as 10% interest rate compared to that of banks.

The government is doing this in a quest to improve availability of housing units.

Figures KT Press obtained from the Ministry of Infrastructure indicate that the quantity of housing production is still low and its cost does not match the purchasing power of the majority.

This, the Ministry says, has pushed most urban residents to access housing through informal practices, because the formal sector cannot offer housing access schemes which cater for all.

According to figures, currently, the capital Kigali has about half of the urban population in Rwanda as indicated in a Housing Market Study for Kigali (2012-22).

The study shows that total housing needs in Kigali (2012-22) will reach 458,256 units, of which 344,068 are newly to be constructed.

Broken down to different purchasing powers, the study shows that 43,436 units will be for social housing accounting for 12.6%, 186,163 units for affordable housing (54.1%), 112,867 units for mid-range housing (32.8%) and 1,601 units for premium housing (0.5%).

Countrywide, the demand has not been thoroughly researched yet.

Who is buying/building these houses?

To own a home is a good dream anyone would wish to see realized. However, a mini survey conducted by KT Press discovered that middle income earners across the capital Kigali are finding life hard after securing mortgage loans to own homes.

Some have remortgaged – as an option to service the loan.

A mortgage loan is a loan whose performance is secured by real property (fixed property such as a house or land).

A registered mortgage gives the lender power to take ownership of the property if the borrower fails to pay back the loan.

The lender can sell, lease, manage or acquire the property to recover the loan.

Bandwagon effect

According to Financial analysts, a well-managed mortgage loan can be of a good benefit to everyone. However, they advise Rwandans to avoid bandwagon effects through rushing to get loans.

Bandwagon effect is a psychological phenomenon in which people do something primarily because other people are doing it, regardless of their own beliefs, which they may ignore or override.

This effect is mostly seen in consumer behaviours.

Elia Mugabo is a Kigali-based financial analyst. He says one of the issues affecting Rwandans is the bandwagon effect while taking decisions on certain things.

According to Mugabo, “Advice number one is to avoid band wagon effect where we tend to say that since my colleague lives in x cell so should I, yet your financial income and expenses are totally different,” says Mugabo.

“And this is a trend seen across young middle-income earners in the country.”

Mugabo says that a perfectly financially-disciplined person cannot rush to acquire a mortgage loan.

“Most of these people – disciplined people – prefer saving to have all they need than rushing to acquire loans,” Mugabo told KT Press.

By sharing calculation, Mugabo bases on an example of a person acquiring a mortgage loan of Rwf23 million at an average interest rate of 17.25% in 20yrs.

“Putting in mind that the applicant’s net salary is 700,000 per month requests for a salary advance loan of Rwf5M at an interest rate of 19% with a monthly repayment of 1/3 of 700,000 which is 233,333 payable in 3 years and you buy a plot.

According to Mugabo, after 3 years you apply for another 5 million plus your savings. Let’s say you saved 100,000 per months. You can get Rwf1,278,200.

At this time, you have Rwf3,834,600 as your savings plus Rwf5 million which is equivalent to Rwf8,834,600.

This is the money that can make build a house in 6 years.

And then apply for a mortgage loan to finish your house payable within 10yrs. You will have completed your house at a lower cost,” Mugabo says.

Despite loan issues, however, world populace still needs to join banking sector, as the numbers are still low.

According to the World Bank’s Global Financial Inclusion database based on information from more than 140 countries, two billion people worldwide are completely unbanked.

The bank says that of this, 20% of unbanked adults receive wages or government transfers in cash, while women make up just over half (55%) of unbanked people worldwide.

The bank says that the proportion of people with bank accounts worldwide grew from 51% to 62% between 2011 and 2014.




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