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 â€“ 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.
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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 â€“ rates change in line with CBN interest rates; Fixed â€“ rates are fixed for a set number of years; Capped â€“ rates are variable but guaranteed by the lender not to exceed a set amount; and Discounted â€“ borrower pays a lower interest rate for a set period after which the interest reverts to the lenderâ€™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 lendersâ€™ 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.
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.