Salary earners with a monthly gross pay of Frw 2 million can apply for mortgage loans to buy houses even if they cannot raise a deposit--up to 30% of the property price--thanks to a new partnership between Rwanda Commercial Bank (BCR) and Soras Assurances Generales Ltd.
The deal, unveiled last week by the two companies, removes the biggest bottleneck home buyers have faced in the past as it make it easy for people who can afford monthly loan repayments to get loans.
According to officials of Soras as well as BCR, there are many people who can fully repay their loans with minimum risk to lending institutions, but "they often struggle to come up with the deposit."
Now with the purchase of the Collateral Replacement Indemnity (CRI), an insurance cover equivalent to a loan deposit issued by Soras, BCR can provide the mortgage without demanding a deposit from borrowers. At the moment, CRI cover is for only mortgage but BCR management talks of "a possibility" of extending the facility to cover construction loans as well in the near future.
According to the information by the insurer, the CRI protects the lender incase of a loss arising out of default. "The lender remains in an equivalent risk exposure as it would have with cash deposit, but enables access to mortgage financing to buyers with affordability while growing its mortgage advance book," Soras said in a statement availed to the media last week.
BCR says that it recently upgraded its home loan products to provide mortgages, construction loans and home equity as part of a broader strategy to grow its loan book and increase profitability.
Indeed, the mortgage products added to good results from other segments like retail and corporate to enable BCR post profit after tax of Frw 2.9 billion in 2011--a significant increase from Frw 2.8 billion made the previous year.
In a development that is expected to encourage more people to buy homes, BCR offers mortgage loans of upto 80% of the existing value of the property for a maximum of 20 years. In order to service the loan, the borrower parts with not more than 50% of his/her disposable income. Under the deal, the purchased property provides collateral.
BCR is also providing construction loans of up to 15 years to those who want to build or complete their houses. The bank provides upto 70% of the total cost of construction with security for the loan being the completed property. Like in the case of the mortage loan, the debt service ratio is not more than half of the borrower's diaposable income.
"The lender remains in an equivalent risk exposure as it would have with cash deposit, but enables access to mortgage financing to buyers with affordability while growing its mortgage advance book."
Home equity loan is also available through which a customer can borrow upto 50% of the value of his/her property for a maximum of 7 years. This could be ideal for people seeking to invest in more properties, buy farms or invest in a business. A maximum of 37.7% of a borrower's disposable income will go into loan servicing.
Under the CRI, BCR customers with gross income of up to Frw 2 million per month will be eligible to access any of these products or purchase property not exceeding Frw 55 million.
Interest rates range between 14.5% and 15.7% per annum.
"This is a new mortgage feature that enables middle and lower income earners who have a repayment capacity but do not have the 20% deposit required to own homes" said Sanjeev Anand, BCR managing director.
Anand said BCR has adequate capacity to fund it customers' mortgage requirements. "We have adequate internal resources--we are already issuing corporate bonds and we also have access to long term development financing and this gives us enough capacity to satisfy our customer's mortgage requirements," he said.
Soras general manager Benjamin Mbudi, said that last year they launched medical and agriculture products to help grass root people and low income earners and they needed a strong partner like BCR. He added that this will also help to solve housing problems in the country.
There is shortage of housing in the country which analysts attribute to the high cost of construction materials, most of them imported.
"There is supply of houses but only for the rich class such as top government officials, top level corporate, and expatriates," Charles Haba, the president of the association of real estate managers and agents said recently.
He says the high cost of construction remains the biggest challenge.
Expensive land and the high cost of building materials which are mostly imported along with skilled experienced personnel, have ensured that construction overheads remain high resulting into expensive houses.
In 2008 for instance, the cost of construction was estimated at $400 per mÂ' but has almost doubled to $700 per mÂ', Haba said.