Making mortgages cheaper without reducing price
Houses are expensive capital goods. The median and average price of a U.S. flat and detached house is $313,500 and $377,700 respectively (U.S. Census, September 2016). That is a lot of money, and is relatively the same story in most parts of the world. Consequently, the average Joe doesn’t pay cash down for a home. Since houses ordinarily come with title deeds, this is mortgaged to secure a loan for the most part the buyer cannot afford.
With an average paying job and many foreseeable working years to go, a working class fellow should be able to afford a mortgage on a commensurately priced house by simply spreading the payments over a long enough period of time. In most developed countries this is the case, but in developing or underdeveloped nations, it’s not quite so.
The World Bank computes mortgage depth of countries as a percentage of the mortgage loans availed in comparison to the country’s GDP. U.S. has a mortgage depth of 75%, UK – 83%, Switzerland – 98% and Denmark a whooping 110%. On the flip side of the spectrum, Ghana, Nigeria, Egypt and Tanzania all have less than 1% mortgage penetration.
This is not surprising, as Nigeria for example has an average mortgage-lending rate of 24% per annum. Again, the interest charged is also not surprising as banks have to compete for funds with “risk-free” Federal Government bonds which pay as high as 18% as against their European counterparts whose Eurobonds have a negative yield.
But irrespective of price; in The Netherlands, which has a mortgage depth of 83%, mortgage loans for first time home buyers is fully tax deductible for up to 30 years. This means that so long as the house you are buying is your first and primary residence, the government will refund your mortgage interest payments from your personal income tax deducted from source and paid by your employer.
This immediately makes mortgages cheaper, irrespective of the price (interest) charged by the bank. So assume a Dutch homebuyer pays 40% of his or her income as tax, and earns 1,000 Euros pre-tax, meaning 600 Euros post-tax. If his bank charges the conventional maximum of 30% of disposable income (post-tax income) as mortgage repayment, this would mean he pays 200 Euros in mortgage repayment. This means the 200 Euros paid as a monthly mortgage repayment would be sufficiently fully refunded from his tax. It is therefore “free” to take a mortgage, it would be ridiculous not to do so, all other requirements being met.
Should this law be enacted in Nigeria where the income tax is about 25% of personal income, this would be the statistics. A homebuyer with a post tax income of 150,000 Naira will pay 50,000 Naira in tax. If he is also charged a maximum of 30% of his income in mortgage repayment he will be paying 45,0000 monthly. Consequently, a fully deductible mortgage policy will just adequately refund his mortgage payment.
This immediately makes mortgages affordable, if not free to home buyers who can fulfil other conditions such as showing a steady source of income for loan repayment. Now before you jump to the Government’s defence on tax loss it will have to bear, note that such loss will be on a steady decline after an initial period of policy hype and then stabilisation.
As people begin to joyfully take up mortgages for first home purchases, this will create significant competition among mortgage providers, setting in motion the basic laws of economics. Mortgage prices would have to fall to stay competitive, consequently reducing tax refund obligations of the government over time.
In all, as mortgage prices and tax deductions reduce on one hand, mortgage penetration of the adopting country would reduce.
Odunsi is a chartered surveyor .