Shopping for a mortgage can be unnerving without the proper information and guidance from mortgage experts. Fortunately, it gets much simpler when you understand the basic ways of categorizing mortgages.
A mortgage, in many ways, is a lot like shopping for a home – there are different options that cater to different needs. Mortgages come in many different types and can be structured many different ways and it is always advisable for mortgage shoppers to find the one that fits their financial priorities.
While all mortgages share the same purpose – funding the purchase of property – they each come with different advantages, disadvantages, and unique terms. Ultimately the type of home loan you choose will have a tremendous impact on your future mortgage payments and overall financial health. Mortgage structures are numerous and varied and depends on the financial institution offering the mortgage. In this article, we discuss some mortgage structures that are peculiar to the Ghanaian market and specifically, Stanbic Bank.
Home Purchase
The first option, home purchase, is the most common option on the Ghanaian market. It involves a lending institution providing funds to a home buyer for the acquisition/purchase of an already built home. Under this arrangement, the lending institution holds the title to the property and releases it to the home-owner only after the completion of the mortgage payment. In a case of a default, the lending institution has a right to repossess the property and sell it to pay off the mortgage.
Developer Construction Financing
The second option is what is referred to as the developer construction financing. This mortgage financing structure involves financing a project from start to finish. The lending institution disburses funds at different stages of the construction process until the property is completed. Off plan financing is possible under this option. Upon completion, the cost of the mortgage is spread over a number of years for the home owner to pay.
Equity Release
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The third option is what is commonly referred to as equity release, which involves a bank paying a home-owner the value of an existing property so the home owner can buy another home or use the proceeds for other purposes. An equity release enables you to unlock the value in your existing property by taking a loan and using the cash released for a variety of personal needs, including the purchase of another home or prime land, or home expansion among others.
Mortgage Refinancing
Re-financing a mortgage simply means allowing a new bank take-over your mortgage. It involves a lending institution paying off your old mortgage exposure from another institution. Most mortgage shoppers choose to refinance so they can lower their interest or shorten their payment term or take advantage of turning some of the equity they have earned on their home to cash. With this option, after the valuation of the property, the exposure is paid off and the balance is given to the client to be used for any other purpose.
Home Expansion Financing
Home expansion financing, as the name connotes, involves accessing funds for renovations, remodeling and expansions of the home. Mortgage shoppers, under this structure, approach lending institutions to acquire funds to work on existing properties. Here also, the amount accessed is spread over a period of time for the borrower to pay.
Vacant Land Financing
Vacant land financing involves a financial package for the acquisition of land. The intent with seeking vacant land financing is to eventually build a house on the block of land one day without it being determined in a specified amount of time. Therefore, unlike most home loans which are used to fund the purchase of a land and property package, a vacant land loan is purely to gain ownership in a block of land.
Public Service Financing
The public service financing for mortgages is reserved for people within Ghana’s public sector who require mortgage financing. This is a special mortgage arrangement that is peculiar to specific banks in the country like Stanbic Bank through the Ghana National Mortgage Scheme.
Although these mortgage structures may not be exhaustive and may not reflect what pertains in other jurisdictions, in Ghana these are the popular ones and knowledge of them will help and guide mortgage shoppers in their decision-making process.
Writer is Head of Special lending at Stanbic Bank.
Writer’s email: SarpongW@stanbic.com.gh