Mortgage in Cameroon: Guide to Buying a House (Real Estate/Home Loans). What is a mortgage loan agreement?
Mortgage in Cameroon: Buying your home or investment property can be very exciting, mainly if it is the first. But it is different when you buy it through a mortgage in Cameroon.
Mortgage in Cameroon
You have applied for a mortgage at the bank to acquire this dream property. This is something you have planned, saved, and sacrificed for. Also, you have just been notified that your loan has been approved. You are ready for the next step and have been told you will need to execute a mortgage loan agreement.
This sounds simple enough, you think to yourself, so you head off to the bank, and they hand you this mountain of paperwork in the name of an agreement.
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With no desire to be overwhelmed by the sheer amount of tiny print, legal and financial jargon, you quickly scheme over it in search of the portions where your signature is required. After all, they are professionals and know what they are doing.
Yes, they do, but do you? You may be reading this and acknowledging that this is precisely what you did or were about to do. This article is about demystifying the mortgage agreement and explaining why you should pay more attention to the fine print.
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What is a mortgage loan agreement?
It is an official binding contract between the borrower and a lender that gives the terms and repayment information about the debt. This agreement establishes the contractual terms and obligations of both parties to a mortgage loan.
A mortgage lender agrees to finance the buyer's purchase of a property in exchange for a conditional right of ownership, known as a lien or charge. The new property owner must repay the original loan, plus interest, as stated in the mortgage agreement, or risk losing their hard-earned property.
Mortgage in Cameroon: Guide to Buying a House (Real Estate/Home Loans)
To understand some of the terms stipulated in the agreement, it is imperative to remember two primary conditions at all times:
1. The lender has risked you by advancing the loan amount to acquire the property.
Most property buyers do not have the cash available to immediately cover the purchase cost. Therefore, by executing the agreement, they agree to transfer conditional ownership of the property to the lender. This is put in place so that should you stop paying back your lender at any point in time, they actually have the right to take ownership and sell your property to recover money.
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2. That the interest is where the lender derives profit on the loan.
The mortgage agreement will have a repayment schedule from five to thirty years. The lender's best interest is to make as much profit, i.e., collect as much interest on this loan as possible.
Most of the terms in the mortgage agreement are directly or indirectly related to how the above two will happen. Understanding them enables you to know what you are getting yourself into (as stated above, it is a binding contract), how to protect yourself, and, if need be, what terms can be renegotiated. So what basic vital things do you need to be aware of that will be put down in this agreement?
i. Loan Amount
Many first-time property buyers do not realize that the financial commitment exceeds the property's sale price. Your mortgage will cater to the amount the bank is willing to lend you towards acquiring the property.
Unless otherwise negotiated with the lender, the loan amount will not include closing costs such as legal fees (both the buyers and lenders), valuation costs, stamp duty, insurance, and charge registration.
To meet these costs, you will need to budget for approximately 9% of the total sale price, and they will have to be catered for before disbursement of the loan. If these amounts are included in the loan advanced to you, it is essential to note that you will pay more in interest charges over the life of the loan.
For example, to acquire 25,000,000 Francs CFA, you need to budget for approximately 2,450,000 FCFA in other costs. If this is included in the loan amount, assuming a 20-year mortgage at 14%, you will pay an additional 4,500,000 XAF just in interest costs for the initial borrowing of 2,450,000 FCFA. Therefore, it is always better to have included these "closing costs" in your savings plan towards this property purchase.
ii. Interest Costs
The interest may be a fixed rate, i.e., it is not subject to change or a variable rate that may fluctuate, usually in line with market interest rates.
With fixed rates, you will have the comfort of knowing that your interest rate will not go up, but neither will it go down even if interest rates fall. You will not have that same comfort level with variable rates, but you will benefit if market interest rates drop as your repayment will be lower.
It is, however, essential to note that some of the advertised fixed mortgage rates, which tend to be very attractive, are not applicable for the entire duration of the loan but may only apply for a specified period, e.g., 5 years.
The interest rate can therefore revert to a much higher rate when the period has lapsed. Ensure you understand what type of interest rate you will be paying and for how long.
iii. Default Conditions
Life is not static, and at times circumstances beyond our control may occur. We may lose a job or source of income and, therefore, permanently or temporarily unable to fulfill the obligation to the lender.
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Where a borrower breaches the contractual obligation to repay the loan in the scheduled installments, additional interest will automatically be charged on the unpaid amounts. If the default continues for an extended period, the bank may call on the security, i.e., sell the property to recover its money.
It is essential to understand what the financier will consider as default and what action they will take. Will one late payment mean that auctioneers will be at your house, or is it after several months that drastic action on their part will lead to this?
Should you default, are there any late fees or penalty interest rates that will become payable on your loan? On speaking to several banks when writing this article, they did give the impression that it is also in their best interest to come to some form of agreement should this happen. Be very clear with your financier on what default is considered to be and the consequences.
iv. Prepayment Penalty
This is the main contentious issue in mortgage agreements. A prepayment penalty is levied if the borrower pays off the loan balance early.
The purpose of a prepayment penalty is to compensate the lender because of the lost opportunity to earn interest and realize the profit on the loan. Borrowers should ask up front if a mortgage agreement includes a prepayment penalty and what period this penalty would apply to.
Some financiers will levy penalties for only a certain period, e.g., if the mortgage is paid within the first five years. This is because banks make most of their interest in the early years of a mortgage. The table below helps us untangle this further and shows what the bank loses when paying your loans early. It illustrates how much money a bank or mortgage lender would make in interest at the various stages of a 20-year mortgage.
- Mortgage Amount 25,000,000 FCFA
- Interest Rate 14% p.a.
Years Interest Earned By Bank.
- Years 1-5: 17,000,000 XAF
- Years 6-10:14,200,660 XAF
- Years 11-15: Kes 10,200,000 XAF
- Years 16-20: Kes 5,000,200 XAF
- TOTAL INTEREST PAID TO BANK ( excluding initial loan amount/principal): 49,922,248 XAF.
In summary, most of the interest on this 20-year mortgage will be earned in the first ten years. Another way of analyzing it is understanding the components of the scheduled mortgage repayment – 310000 XAF -using the same example.
The enumeration below shows how much of the monthly repayment is allocated towards principal (the original loan balance) and interest (lenders profit) on various stages of the mortgage.
Years Principal Component vs Interest Component
- Year 1 20000 Francs: 280,000 FCFA
- Year 6 40000 FCFA: 260000 FCFA
- Year 11 60000 FCFA: 235,000 FCFA
- Yrs 16 155000 FCFA: 155,000 FCFA
- Year 20 265000 FCFA: 45000 FCFA
Therefore, this is why the lender would want to protect their right to earn a profit, particularly in the early years. It also illustrates why paying even just a portion of your loan balance early or making extra monthly repayments can significantly reduce the amount of interest you will pay over the life of the mortgage.
Find out how much of your mortgage can be paid off without incurring penalty fees and in which periods. The best-case scenario is that you shop around for a mortgage that does not have these prepayment penalties. The speed at which you pay down your mortgage has a massive effect on the amount of interest you pay over time.
I am sure you would never agree to drive blindfolded. The same principle applies when signing on the dotted line with the bank. Take time to read this essential contract, and if need be, get advice on what the terms mean. This is a necessary step towards financial freedom for yourself. Therefore, it deserves every bit of attention.