The interest rate on your mortgage is one significant component to look out for when shopping around for the right mortgage loan for you. However, just as important are fees and other charges which mortgage prospects tend to ignore at the point of signing the offer letter, but later refer to as “Hidden Charges” or “Hidden Fees”.
interest rateIn most cases, these “hidden fees/charges” are really not hidden. Typically these fees/charges are fully disclosed on the offer letters which prospective borrowers execute, supposedly acknowledging and agreeing to the terms and conditions of the loan. It is critical to actually understand not only the percentage fee being charged, but also the absolute Naira and Kobo implication, as well as the frequency of such charges through-out the life of the loan.
It is important to understand the dynamic of the costs involved in accessing a mortgage loan. The way to think about it is to split these costs into 3 buckets:

Interest Rates:
The interest rate, along with the loan tenor, helps determine what the Equal Monthly Instalment (EMI), will be for any given loan amount. Hence for any given tenor and loan amount, the higher the interest rate, the higher EMI.

With regards to interest rate, the mortgage prospect should be clear whether he/she is accessing a fixed or variable rate loan. Fixed rate loans have the same interest rate throughout the tenor of the loan, while variable (or adjustable) rate loans fluctuates as market interest rate varies. In the US for example, there are various mortgage products based on whether the rate is fixed or variable and depending on the tenor e.g. 30yr fixed rate, 15 year fixed rate, 5 or 7 year variable rate etc.

In the Nigerian context most mortgage lenders have a base lending rate (based on cost of funds and a margin). Some lenders then go further by pricing for risk, based on profile of the borrower (e.g. salaried versus self-employed), if salaried, and the salary is paid directly to the lender, then the customer may be perceived as less risky, and the customer enjoys a lower interest rate. Similar analysis maybe done on certain categories of self-employed, for example, a self-employed individual who runs an event centre, who seeks a mortgage from a bank, and has his primary banking relationship (with historical evidence) with the same bank, may be able to enjoy slightly lower interest rate depending on the volume of the customer’s business.

Fees:
Different types of fees may be charged over and above the interest rate paid by the customer. The customer may incur certain one-time fees (such as processing fees), recurring fees (such as management fees) or it could be a fee triggered by an event (such as late payment fee).

Below are examples of mortgage related fees which are typically disclosed on the offer letter:
Processing Fees:
A one-time charge, paid at the inception of the transaction. Some institutions actually use this in part to cover cost of transaction due diligence, sometimes including cost of loan processors.
Commitment Fee (or Commencement Fee):
Often means the same thing as Processing Fees, depending on which naming convention the institution chooses to go with, perhaps aligning with other fee structures in other divisions within the same organisation.
Management Fee:
This is a recurring fee that could be charged annually, semi-annually, quarterly or even monthly. The important thing is to understand how much is being charged and what it aggregates to annually e.g. 0.5% management fees quarterly is in effect adding another 2% per annum over and above the interest rate.
Facility Fee:
Again, down to the naming convention in the institution you access your mortgage from. It is usually a one-time fee at disbursement.
Late payment (or Default) Fee:
Some institutions charge a late payment fee, which simply means a fee charged if customer fails to make his/her monthly repayment at the repayment date. Usually the fee is applied after a grace period which could be a few days after repayment date. Again both the fee charged and the grace period are usually disclosed by the lender. It is very important to understand your monthly mortgage repayment date, and repayment amount or Equal Monthly Instalment (EMI). It is also critical to make sure payment is made on or before that date as this fee could aggregate/accumulate to a significant amount for repeat offenders.
Prepayment (or early repayment) Fee:
This is a fee charged if the borrower liquidates the loan i.e. pays back the loan either partially or in full before maturity. This is more prevalent in periods of declining interest rate where customers begin to switch (or refinance) there loans in order to enjoy lower rates from other institutions. It however becomes an administrative nightmare for the lender who contends with full or partial liquidation occurring frequently, hence the charge to discourage frequent switching.

In the Nigerian context however, with high interest rates, lenders try to keep the prepayment fee at a minimum, or even make it a token amount to allow those who want to liquidate the loan do so in an affordable way. This fee should not be a deterrent to customers looking to fully liquidate their loan, but is usually in place to discourage customers from switching from lender to lender for minimal interest rate differentials.
Other costs or charges:
These are actually costs to the borrower but not necessarily income to the lender. They could be due diligence costs, or closing costs such as statutory charges, insurance premiums, legal related costs etc.

Below are some specific examples:
Valuation costs: paid to property valuers but funded by borrower
Legal search costs: paid to solicitors who conduct title searches
Local government charges: paid to relevant government arms/agencies
Fire/Life/Mortgage Protection Insurance: Premiums paid to an insurance company
Title transfer charges: Paid to solicitors and state (or federal government)
Legal mortgage charges: Same as above

In conclusion, it is critical for the prospective borrower to be well informed about ALL charges associated with their mortgage. Understanding the cost details upfront therefore allows the potential borrower compare ‘apples’ to ‘apples’ in terms of evaluating different offers from various lenders, or making more informed decisions given say ‘rent versus buy’ options etc. The upfront grasp of the mortgage costs, supported by the mortgage lender’s proactive communication initiatives such as clearly discussing details of the offer letter, providing repayment schedules, repayment reminders/triggers etc. will contribute towards reducing the information gap and hence (all things being equal) reduce repayment difficulties on a well underwritten mortgage.

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