How Do Construction Loans Work In Nigeria?
Construction loans can help you bridge the financial gap between planning and completion of your building project. In today’s world, our resources are frequently insufficient to meet our wants and desires. As a result, if you decide to build your own home, you may find that the funds you have are insufficient to cover the cost of the project.
The next logical step is to seek out alternative funding sources. The first sources that come to mind are;
- Mortgage banks
- Commercial banks
- Cooperative societies and
- Friends and family
However, because the cost of building a home is usually high, getting a construction loan from a family member or friend is not a very appealing option.
Getting a Construction Loan From Banks
There are a few things to keep in mind when applying for a home construction loan with a bank.
1. Request A Payment Plan Breakdown
A payment plan is a spreadsheet that shows your monthly deductions for;
- Repayment on principal
- Interest payment
- Amount paid on charges like management fees etc.
- The duration of the loan
This spreadsheet summarizes your loan repayment strategy. If your loan repayment plan indicates that you’re on the verge of a credit crisis, it’s prudent to consider reducing the proposed loan amount. It’s great to have a house. However, don’t jeopardize your mental health in the process.
2. Pay Attention To The Fine Print
What are the construction loan’s terms? Are you able to pay off the loan in full if and when you have the financial means to do so? Are you obligated to continue making interest payments if you decide to pay off the loan balance in full sometime in the future?
3. How Will The Loan Affect Your Financial Situation?
A home loan speeds up the construction process, which is exactly what we all want… to be able to move into our own home as soon as possible. However, if that loan will cause you sleepless nights, you should reconsider. Many people have abandoned the idea of taking out a loan. Instead, they purchase a plot of land for sale and gradually develop it over several years.
Others supplement their personal finances with cooperative society loans to give the construction process some heft. The interest rate on many cooperative society loans is 9%. When compared to commercial bank interest rates of 17% to 22%, this is a fantastic deal. So make your decision. It’s entirely up to you.
Taking Loans from Cooperative Societies
A company-based cooperative society’s maximum loan amount is determined by the company you work for and the wealth of its members (e.g. oil company workers with large pay). Cooperative societies can assist to some extent, depending on the amount of savings you already have with the cooperative society and the maximum amount of borrowing allowed for members for a home building loan or any other loan.
But, in any case, there will be a loan limit or upper ceiling on loans, and construction loan requirements will frequently exceed what the cooperative society is willing to provide. If your home construction loan needs to match what your cooperative society can provide, you won’t have a problem because cooperative societies charge much lower interest rates on loans than commercial banks.
If you require far more than a traditional cooperative society can provide, you will have no choice but to work with banks. The following were the rules of one cooperative society in the food and beverage industry:
- You can only take out a loan that is equal to the difference between your savings and the loan you have already taken out (your debit).
- You are not permitted to take out any loan above 3 million naira (upper limit on loans).
Getting Mortgage Loans In Nigeria
Mortgages are a type of loan that allows you to pay for a home in installments. In Nigeria, this type of financing is becoming more widely available. Mortgage solutions have been pushed by both private lenders and the government as a solution to Nigeria’s housing shortage.
One of these government programs aimed at solving the problem is the National Housing Fund (NHF). The NHF offers good mortgage rates as long as you are eligible. In Nigeria’s larger cities, such as Lagos and Abuja, mortgages are readily available. The formal nature of mortgages is one of the reasons for this.
For banks to lend you money to buy a house, the house must be verified through proper documentation. Outside of Lagos and Abuja, verification is frequently an afterthought. In theory, getting a mortgage loan is simple, but in practice, it can be challenging. We’ll explain how to go about getting a mortgage loan in Nigeria in the sections below;
The National Housing Fund
The Federal Mortgage Bank of Nigeria established the National Housing Fund (NHF) (FMBN). The primary goal of this fund is to provide Nigerians with affordable residential housing. Employees in the public sector and the organized private sector contribute 2.5 percent of their basic monthly salary to the FMBN under this scheme. The FMBN is in charge of administering this fund, which is used to help Nigerians who have contributed to the scheme finance their homes.
The FMBN can contribute up to 90% of the cost of a potential home. These mortgage loans have lower fixed interest rates (as low as 6%) and are often available for up to 30 years. The maximum amount that can be borrowed is 15 million Naira. To be considered for the loan, you must meet the following criteria:
- Registered NHF1 (employer) forms NHF2 (employee) forms
- A minimum of 6 months of contributions
- Apply through accredited mortgage banks in Nigeria
- Provide sufficient evidence of monthly income
Who Can Get A Construction Loan In Nigeria?
Developers can also finance new construction homes, as mentioned briefly in previous sections. This is especially true in Abuja, where the stock of newly constructed homes is constantly increasing. Some of these developers may be able to assist you with the cost of a mortgage by contributing to your initial deposit.
Many of these developers also have direct relationships with primary mortgage institutions, where they have special payment plans in place to assist potential customers with financing their new homes. If you are formally employed on a full-time and permanent basis, you may be eligible for a mortgage.
You must also have a sufficient deposit saved, as well as no outstanding loans or a history of such. The majority of mortgage lenders will also look at:
- Your monthly income
- Your monthly expenditure
- Your existing debt profile
- The value of the property you want to finance
You also need to examine your financial situation to see if you can afford a mortgage.
Like buying a house, construction can be costly. This is where getting a construction loan comes in handy, as they help you cover the cost for the building materials and labor required to develop a new home. There are several construction loan options to choose from, apart from the traditional mortgage.
We hope this article helped you gain insights into how construction loans work in Nigeria and the different types of financing you can get.