For many Ethiopians, owning a home is an element of the Ethiopian dream. For most Ethiopian homeowners, getting a mortgage is just one step in the process. Let’s review some mortgage basics before we get started. To begin with, what does the word “mortgage” actually mean? A ‘mortgage’ is not to be confused with a ‘loan’. A “loan” is any type of financial agreement in which one party accepts a lump sum payment and promises to pay the other back. One particular type of loan used to finance real estate is a mortgage. A mortgage, sometimes referred to as a mortgage loan, is a contract that you, the borrower, have with a mortgage lender to use the lender’s money to buy or refinance a house. You agree to pay interest on your loan over a period of years. A home, house, or mortgage loan has a long repayment period; according to bank regulations, payments may be made on a monthly or terminal basis for up to 20 years.
According to a very recent blog on Goh Betoch Bank [1] Mortgages are classified as “secured” loans. In the event of a secured loan default, the borrower gives the lender collateral. The residence serves as the collateral in a mortgage transaction. If you default on your mortgage, this arrangement allows lenders the authority to legally seize your property through a process known as foreclosure. Fully amortized loans provide a predetermined payback plan that guarantees loan repayment at the end of the loan term. With a mortgage, as opposed to other loans, your lender has the option to sell your house to recoup its losses in the event that you are unable to make loan payments. Contrast that with what occurs if your credit card debt is unpaid: You are not obligated to return the products you bought with the credit card, even if you might have to pay late fees to bring your account current and deal with negative consequences on your credit score.
Home Financing Landscape in Ethiopia
Home loan is one of the highly requested loan services in Ethiopia. Although the requirements vary throughout banks, this financing program is suitable for clients who want to buy a new home, build an extra home on an existing compound, or build their own house from the ground up. According to the Africa Housing Finance Yearbook 2022, Ethiopia has an underdeveloped system of housing finance. More than half of the housing market is financed informally through relatives, friends, and savings groups, and only 23% through mortgages. [2] For example, while banks granted loans in Q3 worth Br7.7 billion (US$147 652 447),17 the proportion of loans allotted to housing is small, partly due to inadequate clarity on ownership rights. The proportion of loans directed to housing and construction of total loans disbursed was 11%18 and 7.1%19 in Q2 and Q3 2022, respectively.
Common Requirements to Access a Home loan in Ethiopia?
Most people who buy a house do so with a mortgage. A mortgage is necessary if you are unable to cover the entire cost of a property out of pocket. Even if you have the means to pay it off, there are instances in which owning a mortgage makes sense. For instance, investors may take advantage of tax savings and mortgage properties to free up cash for other investments. While the majority of banks share the same fundamental requirements for obtaining any type of loan, including home loans in Ethiopia, certain terms, such as interest rates on bank loans, collateral values, repayment terms, and repayment currency types, can vary between customers and between banks. According to Banks Ethiopia[3], In Ethiopia, banks require the following basic standards before offering a home loan:
- the applicant must be a bank customer for at least a year;
- the application must be completed completely and signed by the applicant;
- the applicant must provide an eligible identification card (passport or living permit) or an ownership certificate for the business they own;
- the applicant must typically deposit between 30% and 50% of the requested loan amount;
- and the applicant must provide a collateral property (copy of the selling agreement of the house they are purchasing).
Diaspora House Loan Access
Ethiopian real estate is being acquired by numerous diasporas. In fact, according to a LinkedIn article by Live Ethio [4], persons referred to as diasporas own up to 90% of newly constructed properties in the capital Addis. Nevertheless, most locals and diaspora residents no longer have access to financial support for the purchase of these new houses. As a result, for borrowers who meet the requirements, local banks have begun to provide mortgage financing alternatives. Why are banks providing these loans? Firstly, they help the diaspora by giving them the money they need to buy the house of their dreams. Furthermore, repayment of loans in foreign currency (or local currency at a high-interest rate) is received by the bank in exchange.
So what are the steps to obtain financing for diasporas looking to purchase real estate in Ethiopia?
- Obtain and provide necessary documents proving Ethiopian origin
- Provide evidence of employment and salary
- Declare marital status and show evidence
- Provide authenticated sales agreement with the real estate company
- Once the loan is approved, sign the respective documents for the bank
For citizens who are nonresidents/foreigners of Ethiopian origin who want to access diaspora mortgage loans in Ethiopia, banks have similar criteria with additional requirements and benefits for their customers, which are:
- Has to be a foreign resident for at least a year (varies between Banks)
- It is favorable if the initial deposit and the repayment of the loan bring foreign currency
Benefits such as:
- The customer can be favored with a better loan interest rate, less loan processing time, and longer repayment duration (according to the Bank rule and regulations)
- The loan Interest rate is calculated annually with an average amount of 8-10%, this amount is variable depending on company policies.
[1] https://www.gohbetbank.com/blog/what-is-mortgage/
[2] https://housingfinanceafrica.org/app/uploads/2022/12/V21-Ethiopia-Final.pdf
[3] https://banksethiopia.com/home-loan-in-ethiopia-2023/
[4] https://www.linkedin.com/pulse/process-obtaining-loan-diasporas-buy-real-estate-