In the Nigerian residential market, property prices have shown a consistent upward trajectory across various submarkets. Our 2023 Price Index Report indicates a notable double-digit increase in property prices nationwide compared to 2022. In the report, Lagos and Abuja emerged as the most affected cities, with Lagos experiencing an extraordinary rise driven by the escalating costs of building materials, FX volatility, and increased operational expenses.
Specifically, Lagos saw residential price increases underpinned by economic challenges. Meanwhile, Abuja’s price surge is attributed to its status as a government and diplomatic hub, where demand pressures have remained resilient.
Despite these price surges, economic indicators paint a complex picture. The National Bureau of Statistics (NBS) reported that Nigeria’s unemployment rate climbed significantly to 5.0% in Q3 2023, marking a 0.8% increase from Q2 2023. Additionally, the labour force participation rate declined to 79.5% in Q3 2023, down from 80.4% in Q2 2023, reflecting broader economic constraints.
These trends highlight the dichotomy within the market, where rising property costs are juxtaposed against challenging economic conditions, influencing affordability and market dynamics in the residential sector.
Given these market dynamics, prospective homebuyers are often caught between the traditional route of taking out a mortgage and the increasingly popular option of rent financing. Both have distinct implications, which is why we have assessed both options below.
What Does Rent Financing Mean?
Rent financing is an innovative option that allows tenants to pay rent in smaller, manageable installments, usually on a monthly basis, rather than a lump sum payment upfront. This is especially popular in Nigeria, where landlords often demand 1-2 years’ rent in advance, making it challenging for many to afford housing.
Advantages of Rent Financing
1. Lower Upfront Costs:Rent financing requires little to no down payment. This makes it easier for individuals to move into a property without the significant upfront financial cost associated when outrightly purchasing a property.
2. Flexibility: Rent financing offers flexibility, allowing tenants to move or upgrade properties without the long-term commitment of a mortgage.
3. No Maintenance Responsibilities: Unlike owners, tenants using rent financing are not responsible for major maintenance or repairs. These responsibilities are handled by the property owner or landlord.
4. Easier Approval Process: Rent financing often has a simpler approval process compared to mortgages. There are fewer requirements regarding credit history, income verification, and documentation.
5. Mitigates Market Risk: Rent financing provides a hedge against market volatility. Tenants are not affected by property price fluctuations, depreciation, or potential downturns in the real estate market.
6. No Long-Term Debt Obligation: Rent financing does not involve taking on long-term debt. Individuals can manage their finances without the burden of repaying a mortgage.
7. Access to Premium Locations: Rent financing allows individuals to live in premium locations that might be unaffordable if the property was purchased outrightly. This offers the tenant better amenities and lifestyle choices.
8. Shorter Commitment: With rent financing, tenants can choose shorter lease terms. This allows them the freedom to adjust their living arrangements based on changes in their financial situation or personal preferences.
Read More: 5 reasons why rent financing may be a better choice for you
Read More: 7 companies making renting easier for Lagosians
Disadvantages of Rent Financing
1. No Equity Building: Unlike mortgages, rent financing does not allow tenants to build equity in the property. The monthly payments go entirely towards rent.
2. Limited Stability: Rent financing lacks long-term stability, unlike when you’re purchasing a property. Tenants are subject to lease renewals, rent increases, and the possibility of eviction if the property owner decides to sell or use the property differently.
3. Higher Long-Term Costs: Over time, the cumulative cost of rent payments can exceed the cost of owning a home. This is especially in high-demand areas where rent prices tend to rise regularly.
4. Lack of Control Over Property: Tenants have limited control over adjustments or improvements to the rented property. Before a tenant can improve a property, they must seek the landlord’s approval. This can be restrictive compared to the freedom an owner has over a property.
5. No Protection Against Inflation: Rent prices can increase with inflation, leading to higher costs over time. But a fixed-rate mortgage provides predictable payments that are not directly impacted by inflation.
6. Lack of Investment Returns: Unlike property ownership, which can appreciate in value, rent financing offers no potential for capital gains or investment returns. This makes it an expense with no wealth-building potential.
What are Mortgages?
Mortgages are one of the most common methods used to purchase a home in Nigeria. They are provided by banks and specialized mortgage institutions. These loans can cover up to 80% of a property’s value, making it easier for individuals to purchase properties without paying the full price outright.
A mortgage is the process of taking out a loan to buy a property, which the borrower repays with interest over an agreed period. Mortgages can be for a short-term or long-term. The repayment period and interest rates can vary based on the type of mortgage, policies, economy and market conditions.
Bodies like the Federal Mortgage Bank of Nigeria (FMBN) and the Nigerian Mortgage Refinance Company (NMRC), are some of the bodies that are making mortgages more accessible and affordable in the country.
Advantages of Mortgages
1.Facilitates Purchase: Mortgages enable individuals to purchase property without the need for the full purchase price upfront, making this process more accessible.
2. Leverage: Mortgages allow you to purchase a more expensive home than you could afford with cash alone.
3. Forced Savings: Regular mortgage payments can help build equity in your home and develop good financial habits.
4. It Provide Stability: Fixed-rate mortgages offer predictable monthly payments. Investors can plan their finances without worrying about fluctuating interest rates.
5. Hedge Against Inflation: Mortgages can act as a hedge against inflation. As property value appreciates over time, the fixed repayment amount remains the same. Which effectively reduces the loan cost in real terms.
6. Property Appreciation: Over time, the value of the mortgaged property is likely to increase. This provides the investors with a potential financial gain when the property is sold.
Disadvantages of Mortgages
1. High-Interest Rates: Mortgages in Nigeria often come with high-interest rates compared to global standards. This significantly increases the overall cost of the loan over time.
2. Lengthy Approval Process: The mortgage approval process can be cumbersome. It involves extensive paperworks, credit checks, and property valuations, which can delay the purchasing process.
3. Risk of Foreclosure: Failure to keep up with mortgage payments can lead to foreclosure, where the lender seizes the property. This can result in the loss of property.
4. Long-Term Financial Commitment: Mortgages involve a long-term financial commitment, typically spanning 10 to 30 years. This can restrict the borrower’s financial flexibility. It makes it challenging to allocate funds to other investments or expenses.
5. Hidden Fees and Charges: In addition to the principal and interest, mortgages often include other costs such as processing fees, legal fees, insurance, and maintenance charges. All these additional fees add up and increase the overall expense.
6. Property Depreciation Risks: If the property value declines due to market conditions or structural issues. The mortgagor may owe more than the property’s value. This leads to negative equity.
7. Rigid Terms and Conditions: Mortgages come with rigid repayment terms, and any changes to these terms often come with penalties or fees.
Read More: Understanding tenant rights and responsibilities in Lagos Property Market
Read More: How a Mortgage System Can Enhance Affordable Homeownership In Nigeria
What Should You Consider Between Rent Financing and a Mortgage?
When deciding between rent financing and a traditional mortgage, consider the following:
1. Financial Stability: Evaluate your current financial status. If you have a stable income and sufficient savings for a down payment, a mortgage might be more feasible. However, if you are looking for flexibility and have limited funds, rent financing might be a better fit.
2. Long-Term Goals: Assess your long-term objectives. If your goal is to own a property in the future, a mortgage may be the better option, as it allows you to build equity over time. However, if your priority is maintaining flexibility without a long-term commitment, rent financing could be more suitable.
3. Market Conditions: The Nigerian real estate market is dynamic, and property prices can fluctuate. Mortgages may offer a hedge against inflation and in turn the rising property values, while rent financing can mitigant against market volatility.
Which Option is Right for You?
The choice between rent financing and mortgages depends on your financial capabilities, the economy state, and market conditions. If you value flexibility, lower initial costs, and short-term living arrangements, rent financing could be the best choice for you. But if your end goal is to own a home in the long run, and long-term financial investment is your priorities, a mortgage may be more suitable.
Conclusion
Both rent financing and traditional mortgages have their distinct advantages and challenges. Understanding your financial capability and future goals will guide you in making the best choice. Whether you use rent financing or a mortgage, it’s important to stay informed about the terms and conditions associated with each option or contact buyletlive to advise you on the best decision you should take.
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