What borrowers did not know about home equity loan

When the defunct Bank PHB came up with a product it called ‘Homeowners Advantage’, it simply highlighted the benefits available to people who owned homes and needed to create wealth by borrowing against such homes.

This, in effect, is what economists call home equity loans. It is a form of loan, also known as ‘second mortgage’ that is collected against the actual equity of the real estate asset (the house or home).

In Nigeria, a good number of home owners do not know that they could use their homes to create wealth by borrowing from lenders using the equity already built up in those homes.

Some of those who know, cannot borrow with their houses because of the Nigerian factor. This is a country where, according to Andrew Nevin, the chief economist at PwC Nigeria, 95 percent of its real estate assets are not in formal mortgage.

This means that those assets do not have valid titles and are, therefore, dead assets. For this class of assets, home equity loan or homeowners advantage does not apply.

Though home equity loan bears similarities with mortgage, there is a striking difference between the two such that whereas mortgage is granted to make a purchase, home equity loan, on the other hand, is only accessible to individuals who already own homes.

So, if somebody wants to purchase a home, he will apply for a mortgage, but if he already owns a home but requires funds for other expenses, then he can use it as collateral and apply for a home equity loan.

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One of the upsides of home equity loan is the fact that it is also accessible to individuals who are yet to complete their initial mortgage repayment, which is why it is called second mortgage. In this case, the value of the house is placed side by side with the amount left of an existing mortgage which then forms the equity and the loan amount accessible to the borrower.

What this means is that if a borrower’s house is currently valued at ₦20 million and he has a mortgage balance left of ₦12 million, it means that his home equity is ₦8 million (40 percent).

Lenders often grant as much as 80 percent of the home equity in loan, so using the above example, that would be ₦6.4million. Home equity loans can also be accessed on fully-owned homes as long as their market value can be ascertained.

“Home equity loans are generally offered in Nigeria by primary mortgage institutions (PMIs) and are also straightforward to obtain with the right documentation,” Lanre Awode, property market analyst at Alpha Mead Group, explained to our reporter at the weekend.

“With an unencumbered title, verifiable source of monthly income to facilitate repayment, purchase of a mortgage redemption forms, and incurment of other closing charges (appraisal fee, origination fee etc), you can easily convert the equity on your home to liquidity for other investments,” he added.

According to him, home equity loans are especially ideal when making down-payments for the purchase of another property or to fund major renovation projects in the house.

He pointed out however that there are a number of disadvantages to home equity loans and atop the list is the ever-present possibility that the borrower could be homeless in the event of default since the home is the collateral.

“Another risk factor is that if the loan is obtained on a property still on mortgage, the burden of repayment doubles on the borrower since he will be servicing the initial mortgage and the home equity loan simultaneously,” he said.