A mortgage is a loan secured
from a mortgage lender to buy a property for the purpose of home-ownership, and
paid off in installments over a set period of time. The length of time that the
borrower agrees to take to pay off the loan is known as the Tenor of the
mortgage.
A mortgage is made up of two elements – the Capital, which is the
original amount borrowed to buy the property; and the Interest, the amount
charged to lend you the money. The mortgaged property secures your promise that
the money you borrowed will be repaid. If the loan is not repaid as agreed, the
lender can take possession of the property and sell it to recoup the money
owed. For most people, a mortgage is the largest and most serious financial
obligation they will ever make.
Choosing a
mortgage
When choosing a mortgage there are three important things to note:
Interest rate: Interest rate is often seen as the most important consideration
when choosing a mortgage. In general, borrowers look for a mortgage with the
lowest possible interest rate.
The lower the interest rate the less money you
have to pay back over the mortgage term. Each mortgage lender has its own
standard variable rate (SVR) of interest. These can vary by several per cent,
although most mainstream lenders will be within a couple of per cent of each
other. However interest rate deals vary from lender to lender and sometimes the
same lender may even offer different mortgage deals.
There are four main types
of interest rate offers: Variable – rates change in line with CBN interest
rates; Fixed – rates are fixed for a set number of years; Capped –
rates are variable but guaranteed by the lender not to exceed a set amount; and
Discounted – borrower pays a lower interest rate for a set period after which
the interest reverts to the lender’s SVR.
Repayment terms: Mortgages payments
are usually made monthly and can be done in two ways. The first is a repayment
of the capital as well as the accruing interest on a monthly basis. This kind
of plan is often known as a Repayment Mortgage. The second method is to pay off
the interest only every month and then at the end of the mortgage term e.g. 25
years the capital is repaid as a lump sum. This plan is usually known as an
Interest-Only Mortgage. While the Repayment Mortgage plan often requires higher
monthly payments than the Interest- Only plan, the borrower will not have to
produce a large sum to pay off the loan capital at the end of the mortgage
term. In choosing a payment plan borrowers must bear in mind that the end of
their mortgage term may fall around their retirement.
The second important
point to note about repayment terms is that some lenders may penalise borrowers
for paying off their loan before the mortgage term expires. This penalty is
known as an early redemption penalty. While you have the right to pay your
mortgage off at any time you like within the mortgage term you should find out
before you sign up for a mortgage what if any early redemption penalty there
might be.
Mortgage fees/Charges: These are also called administrative fees and
are charged by lenders to cover costs of valuation, legal, banking
administration etc. Lender fees can be anything from a several thousand naira
to millions of naira, depending on the mortgage you choose. Some lenders’ fees
are higher than others for no apparent reason so make sure you study all the
fine print in the mortgage agreement before you sign. Ask questions to help you
understand what each fee has been charged for and try to negotiate. Some
lenders will be willing to reduce their fees.
If you are unsure about the
details of a mortgage agreement and need some advice, a reputable mortgage
broker can help you for a fee of their own.
Mortgage providers
A mortgage can
be obtained directly from any primary mortgage banking institution, or you can
use a mortgage broker to find the best mortgage to suit your particular needs.
Low interest mortgages can also be obtained from government via the National
Housing Fund (NHF) scheme.
Source: MBAN via Vanguard
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