Joseph Olanyo
29 April 2008
Kampala — Commercial banks and real estate dealers have joined forces to offer several avenues through which house buyers can access houses
Encouraged by continued population growth, a strong economy, and enthusiastic foreign investment, builders in Uganda are breaking ground at a record pace.
And home sellers, eager to ride the wave of soaring property values, are displaying properties that are still on the drawing board. The market, though nascent, has shown signs of exploding into a cut a run race on the back of a growing consumption-driven middle class.
"Everybody is thinking about building. So who will buy all these houses being set up by real estate developers," Mr Anthony Kisenge, a retired civil servant said.
Although he does not own a home himself, Mr Kisenge is among many Ugandans who are scared of taking a mortgage loan for housing.
"It's a good idea, but for how long will you be servicing your mortgage," he wondered. Commercial banks and real estate dealers have joined forces to offer several avenues through which house buyers can access houses. Prominent among these is the house mortgage that is taking the country by storm.
National Housing and Construction for instance is selling 2-bedroomed housing units at Shs105 million. The company is also developing the Namungona housing estate expected to be completed by 2009.
While real estate dealers and banks are displaying houses and house loans most potential buyers are, for the time being, restricted to window shopping because of the high cost of borrowing and the cumbersome process of accessing the loan.
National Housing and Construction executive flats in Naalya. File photo
Most of the would-be borrowers are also unsure about the merits and demerits of long repayment periods for their house loans.
The General Manager Credit and Mortgage Housing Finance Company Ltd (HFCL) Mr David Niyikiriza contends that despite the high interest rates on mortgage loans, the demand is growing.
Mr Niyikiriza attributes the demand to increased awareness. "The industry has grown. We see our portfolio almost doubling from Shs60 billion in 2005 to now about Shs120 billion. This means that the activities have actually increased and market property values are going up," Mr Niyikiriza said. It is estimated that Uganda has a shortfall of 50, 000 housing united and this expected to increase over next ten years.
Initially, Housing Finance was the only financial institution involved in mortgage loans. However, with the boom in the housing and construction industry, a number of financial institutions have since joined with more mortgage loan offers.
Dfcu Bank, Stanbic and Standard Chartered now offer mortgage loans.
HFCL's Chief Executive Officer Nicholas Okwir said Housing Finance's demand for mortgage has been rising at an average of 40 per cent since 2002. "It's a result of robust growth," Mr Okwir said.
HFCL, the leading player in the industry, commands 75 per cent of the mortgage market. Mortgage loans depend on the project being undertaken and they range from anything between Shs5 million to billions of shillings, with current market interest rates revolving between 16 per cent and 19 per cent.
Uganda's housing market and property values have in recent years witnessed price appreciation outstripping income growth, with most of the price gains concentrated on the well-to-do.
In particular, it has been suggested that borrowers, emboldened by rising house prices, are turning to riskier types of mortgages in order to qualify for the debt necessary to purchase increasingly expensive homes, thereby potentially setting the stage for repayment difficulties in the future, likely to replicate the US housing melt down.
Mr Hamu Tumukiriza a former Housing Manager National Housing and Construction Company Ltd (NHCCL) contends that the trouble with housing mortgage is the high interest rates.
"In countries like the US, interest rates on mortgage loans are about 4 to 4.5 percent. In Uganda, it's almost five times that. You can't finance a house when you are going to finance a big percentage of your re-payment," Mr Tumuhairwe, now an evaluation surveyor said. "Compared to the earning capacity of Ugandans, this is still out of reach for many people"
In a report titled: "Growth despite constraints," investment advisors - African Alliance, described as "problematic" the current interest rates on mortgages.
Interest rates on mortgages at an average of 16 per cent and 20 per cent per annum, is quite high compared with Kenya's rate of between 8 per cent and 12 per cent.
Industry experts attribute the high interest rates to absence of Credit Reference Bureau and poor saving culture among Ugandans, which has forced financial institutions to look to off-shore lending institutions to finance their mortgage products, translating into higher interest rates.
DFCU Bank relies heavily on off-shore borrowing to finance its mortgage portfolio and long-term lending. Some of the institutions include the International Finance Corporation, CDC, Proparco, FMO Netherlands, OPEC fund for international development and Norfund among others. However, Housing Finance recently issued a corporate bond worth Shs30 billion to finance long-term lending of mortgage products.
Taking out a mortgage is a complex process. It is signing up for life. Traditionally, once people have signed the dotted line, they are reluctant to restart the process and shop around for a better deal.
According to Mr Walter Ogwal, the Standard Chartered Bank Credit Reference Bureau project manager, to access mortgage, customers are required to get a letter of undertaking from the employer stating how the bank will deduct monthly from the loan holders salary account over a period of 10 to 15 years.
Self-employed individuals need an offer of sale letter or land title for those who want to develop property themselves.
"What's important is that the amount of loan should not exceed the value of the property you want," Mr Ogwal said.
Mr Ogwal said Standard Chartered Bank charges 17 per cent Interest on mortgage payable up to 15 years depending on the amount one has taken.
To prop up its own mortgage portfolio, Stanbic Bank recently held an auto and home loan exhibition in Kampala featuring a number of property developers including Nationwide Properties, Kensington and Akright Properties Ltd.
Consequently, families have taken on unsustainable mortgages, leaving them vulnerable to the sharp increases in interest rates.
Yields on government bonds - a key measure for the cost of borrowing - have also increased in recent years, sending shockwaves through financial markets, some financial analysts say.
Also, homebuyers' expectations of continued increases in house prices may have overshadowed any concern about the potential for higher mortgage payments in the future. In this manner, by feeding expectations of continued gains in house prices, the housing boom may have induced added mortgage risk.
While customers rush for plush homes, they may not realise the debt burden they are getting into. If, for instance, one took a home loan took Shs30 million from a bank at 16 per cent interest rate for a 20-year period, one would have paid Shs100 million (Shs100, 170,028) at the end of the mortgage period. This includes principle and interest accrued.
"People fear mortgage because of its implication and prefer to develop their projects through other means," said Mr Matthias Okello, who is building a house in Namugongo near Kampala.
As the economy continues to experience a boom in the construction industry, developers contend that most of the up coming housing is not as a result of mortgage.
People who are already stretched to the limit servicing heavy loans say they don't want the extra monthly expense of paying for Mortgage Property Protection Insurance.
Mr Ogwal said mortgage loans are insured under Mortgage Assurance Protection plan, a facility that takes care of ones mortgage in case of eventualities like death or loss of jobs.
"This protects your property if you are a bread winner so that your family is not affected. In mortgage assurance, death is stated. So long as you don't commit suicide, the mortgage plan will take care of that "Mr Ogwal said.
One of the most notable concerns associated with the housing boom is based on the perception that despite historically low interest rates, homebuyers nevertheless are frequently opting for mortgage features that reduce the level of initial payments at the expense of higher or more variable payments over time.
Supporting this concern is the idea that homebuyers may have been willing to assume the added risk of variability in future mortgage payments, if lowering their initial payments was necessary in order to qualify for the level of debt needed to purchase increasingly expensive homes.
Some economists contend that one of the biggest problems affecting borrowers is speculation. It is said that anticipating any future growth in income is potentially dangerous and that mortgage loans should be taken based on the current financial status.
Homebuyers used to borrow heavily knowing that inflation and pay rises would eat away at the debt. But without the benefits of high inflation, a loan taken out now will still be a heavy burden in 10 years' time. High mortgage borrowing leaves homebuyers in huge difficulties if they lose their jobs.
With the volatile interest rates still at their best, the mortgage party is hearty for a while, but the re-payment hangover is still gruesome. And as times change and people's lives changing, there is need for financial institutions to work out a soft landing for mortgage
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