When news broke that Jyske (A Danish Bank) was offering its customers mortgage loans at 0.5% (negative) interest rates, it sent a huge buzz through the financial services sector globally.
In reality, as this CNBC explainer shows, the bank is not actually aiming to lose money by making out loans. While the interest rate is negative, fixed charges are expected to ultimately tip the cost of the loan to the borrower to just over 0%. Still, for a someone looking to get a mortgage loan in Nigeria, this sounds like a very outlandish fantasy.
Mortgage interest rates from commercial banks in Nigeria cost anything from 18% - 23%. It is important to state that this is per annum. Yes, we can forgive Danes for thinking that Nigerian borrowers live in an alternative universe.
The point can be made that the Federal Mortgage bank lends at 6%, but the point is mooted by the fact that in its nearly half a century of operating, the bank has only managed to write 30,000 mortgages. For a country of 200million people with a housing deficit reportedly nearing 20million units, the impact is comparable to attempting to dredge the Niger with a tea spoon.
This brings into sharper focus the reality that a more helpful way to define our housing crisis is as an affordable credit (rather than housing) problem. While there is still a lot of room for improving building efficiency to lower cost of construction, the bigger opportunity to dramatically ramp up the number of homes delivered annually is to create a sustainable pool of affordable credit.
To give you an insight into the impact of affordable credit on housing, these three tabs show you what a buyer would have paid over 10 years, if they had bought an apartment at the Epicentre with a 25% downpayment when we started. The Danish buyer who gets 0% interest credit would have been paying N125k monthly, while the typical Nigerian buyer who borrows at 23% per annum would have been paying N320k monthly.
Note that the middle tab which shows borrowing at 6% per annum i.e. FMBN rate, implies a N166k monthly payment. This is not dramatically higher than the guys borrowing at 0%, and amounts to about N2million annually which simply means that all the young families currently living at the Epicentre, paying N1.8m annual rent could very easily afford to buy the homes if they had access to affordable credit.
We don't live in the alternate universe called Jyske, so we clearly can't realistically talk about 0% mortgage rates, but 6% doesn't look completely unrealisable.
The big question to ask is, how do we sufficiently de-risk investing in Nigeria as to be able to attract growing portions of the sort of money that the likes of Jyske Bank are lending out are negative interest?