Understanding the basics of mortgage loans
with Hala Bassiouni, Managing Director of Egyptain Housing Finance Co.

1- What exactly is a mortgage loan?

Simply put, a mortgage loan is a payment facility to acquire a home over a long period of time, which in Egypt can reach up to 20 years

2- What is the difference between a mortgage and a personal loan?

There are three main differences between the two. The first is the loan value as banks usually put a ceiling to the amount that a client can take out on a personal loan. The second is the tenor, which is the number of years payments can be made over. In a personal loan the maximum number of years is around 7 while like I mentioned earlier, a mortgage can go up to 20. The third difference is that interest rates on mortgage loans are lower than on personal ones because with the former option, there is collateral (i.e. the property purchased) to account for whereas personal loans are granted solely based on the credentials of an applicant.

3- In Western countries, the mortgage industry represents a major pillar in their economies. Why is Egypt behind in offering mortgage? And what should our upcoming governments focus on to enhance the mortgage industry?

We have several reasons that currently obstruct mortgages from becoming a strong economic growth factor in Egypt but before we discuss them it is important to mention that the mortgage law was issued in 2001 and with only two companies that started operations in 2004.

So in reality it has been only 10 years since the introduction of a completely new product to the Egyptian market. But besides the novelty of the mortgage loan there are three main issues that have been slowing down its popularity in Egypt.

Our first issue is a cultural issue as we are a cash based society, especially with regards to financing a new house. Egyptians inherently are still not used to the idea of loans and interest especially when buying the house they will live in.

The second issue is the mismatch between supply and demand. In other words what the market has to offer in terms of housing units does not match the financial capabilities and demand of the majority of the population. Prices are high and incomes are low. And in other situations, there are buyers who are just starting out their life and yet prematurely want to purchase large apartments to accommodate their eventually increasing family members . Accordingly, it’s still the same concept where the purchase price is much higher than their means.

So how does this impact the perception of a mortgage? An installment on a mortgage loan cannot exceed 40% of a person’s net income and so with this mismatch of prices and incomes, it’s certain that not many people will be able to afford taking out a loan for the property they seek.

The third problem is that Egyptians are long term risk avert. They don’t account for the time value of money and so when they contemplate how much interest is going to be paid over say 10 years they consider it as money wasted. They don’t realize that if they had put that same interest amount in the bank 10 years ago and now decided to buy that same piece of property they would not be able to afford it. Inflation makes property prices skyrocket and that is something very important to consider before disregarding a mortgage loan as an option.

What the government can do to encourage the growth of the mortgage industry in Egypt, is facilitate the property registration process which is currently a long and difficult process. It is would definitely greatly help any applicant who wishes to take out a mortgage loan if the property he wishes to purchase is registered. It used to also be an expensive process, costing up to 12% of the property value, but luckily the government has now reduced it to a flat fee with a maximum of LE 2000.

The government and private sector developers also need to promote the development of housing units that are more realistically priced for the average Egyptian.

4- In North America and Europe, the mortgage rates are around 4%, why are the rates in Egypt as high as 15%?

This is one of those accusations that is regularly tossed around against mortgage loans but it is crucial to understand that interest rates are directly proportional to an economy’s inflation rate. The higher the inflation, the higher the interest. When inflation was high in the US back in the 80s, the interest rate was as high as 20% but now that things have changed, the interest has dramatically gone down. The same applies to Egypt. When we compare to the US and Europe we must look at both sides i.e. inflation versus lending rates.

5- Who would qualify for a mortgage? And would the bank approve to mortgage any property?

The mortgage law states that the income to installment ratio cannot exceed 40% of a person’s net income and so the loan approved for anyone that wants to buy a property is subject to the income he earns per month so that the monthly installment he pays must be within this percentage The difference will be the down payment he is required to put up . And income is any income you can prove. It does not mean only your personal salary. It can include time deposits, certificates, rentals, a piece of land, as well as the collective income of the household etc ( disposable income of the entire family )

As for the property financed, the bank does not mortgage any property. It has to be eligible for registration; meaning that the property is legitimately compliant , has a proper building permit, conforms to building requirements, lawsuit free and any other similar problems that may cause disputes. And occasionally there will be units don’t comply with the legal or technical requirements. The bank needs to make sure that all legal and technical conditions are met before approving a mortgage for any property to primarily ensure the buyer’s best interest before the bank or mortgage company

6- What are the typical loan terms offered in a mortgage (i.e. down payment, loan tenor, rates, etc.)?

The typical terms on average are between 8 – 10 years in Egypt although some do take up to 15. The interest rate lies between 15% - 15.5% and the down payment is usually calculated after the loan amount is determined. The down payment is the excess amount to be paid over the approved loan amount

7- Why don't a lot of banks offer mortgage loans in Egypt?

For a lot of banks, mortgage loans are just one large time-consuming product . It is not a standard procedure like applying for a car or personal loan. On the contrary, it involves a lot of investigation and work before it is granted so that as I mentioned earlier a buyer applying for a loan will not be scammed when making a property purchase. The process ensures that. But again, because it is such a process and still a budding new product, many banks are reluctant to take it on board. It’s easier to stick to standard application car and personal loans.

8- If I buy a property, will it be owned by the bank until the entire mortgage is paid off?

No, the property that you purchase is in your name from the very first day but you cannot sell it or dispose of it to any other party without the bank/ mortgage finance co.’s permission and the transaction will need to be completed in the presence of all three: the financier (bank/ mortgage finance co.) , the buyer and the seller.

9- Do you believe that a mortgage loan offered with today’s terms and conditions in Egypt represent a good value to the average property buyer?

This is a difficult question not because the mortgage system is flawed but it is more of a general flaw in the entire housing system in Egypt. The difficulty of property registration, the overpriced property versus smaller incomes, the high interest rate which is due to the high inflation rate, all contributed to the modest mortgage loan figures achieved so far compared to the real estate existing property stock. The biggest factor is the legislative platform, which the current government is working very hard to fix. They are working to facilitate the registration process, as well as encourage the building of new properties that are more affordable for most Egyptians. These two factors alone will greatly affect the demand for mortgage loans. On the other hand, interest rates have already started going down and so ultimately I do believe and hope that there is a bright future for mortgage loans in Egypt.