Facilitating Homeownership in Ghana via the Rent-to-Own model

Facilitating Homeownership in Ghana via the Rent-to-Own model

Access to affordable housing remains one of the critical socio-economic challenges facing many developing countries. A huge gap between housing demand and supply of affordable housing units persists, compounded further by the ever-increasing home prices beyond the reach of a wage-dependent workforce.

The homeownership journey for many is long, complicated, and sometimes overwhelming, with many resulting in unconventional means of securing housing. Land acquisition, finding the right professionals for construction, and obtaining financing often present enormous challenges. The traditional home acquisition process is confusing and opaque, sometimes leading to financial loss. Due to these difficulties, many low- and middle-income earners retire without achieving their homeownership dream. 

Financing Ghana’s Housing Deficit

Ghana’s 2021 population and housing census put the national housing deficit at 1.8 million units. Estimates indicate that the annual housing demand is between 70,000 to 120,000 units, with only about 30% of this demand met. With the average cost of constructing a two-bedroom house in the urban areas estimated at about GHS 267,000, affordability remains at the core of the housing challenge, as most working-class Ghanaians would not be able to afford a home due to low-income levels.

With average interest rates on cedi-denominated mortgages from commercial banks ranging between 19.00% and 31.7%, most people within the low and middle-income bracket would not qualify for a mortgage. Thus, potential homeowners typically build their homes incrementally, which takes 10 to 20 years on average. In some cases, it takes one’s entire working life.

The Ghanaian Worker’s Pathway to Homeownership

The average Ghanaian worker has three main homeownership pathways: self-build, outright purchase, and mortgage acquisition—beginning from the first pay cheques. Bank-financed options to achieve homeownership remain limited due to low incomes and high mortgage costs. Commercial Banks mostly either price mortgages in US dollars or benchmark the price to the dollar, which is completely unaffordable for low and middle-income workers earning Ghana Cedis. Similarly, property developers also price houses for outright purchase in US Dollars.

Therefore, the large segment of workers who cannot afford mortgages from commercial banks usually saves towards buying land to build their future homes from their first income. Many prospective homeowners make initial down payments for land and pay the outstanding balance over time, while some secure loans to pay for the land and repay the loan over time. However, the land acquisition process in urban areas is cumbersome, often resulting in land litigation and lost investments. Thus, the structural bottlenecks in land acquisition force some would-be homeowners to end their homeownership pursuit. 

After clearing the land acquisition hurdle, the remaining process could extend for many years. The following steps include challenges with raising needed financing, finding qualified artisans, the risk of loss of building materials due to theft, and the long exposure of uncompleted buildings to adverse weather conditions resulting in compromised structural integrity. The process often drags until retirement, and most would-be homeowners live in rented accommodation for most of their working life, and some end up settling in their uncompleted homes due to reduced income. 

A typical homeownership path for a Ghanaian worker

The Rent-to-Own Model 

In urban areas, data from the Ghana Statistical Service suggests that the majority of occupants in residential properties are non-owners and are typically involved in some form of the rental arrangement. 

In most instances in Ghana, a first-time tenant must pay two- or three-year rent in advance and subsequently one year’s rent advance upon each tenancy renewal. The enormous financial burden that rent payment places on tenants for many years in the traditional rental arrangement does not provide ownership opportunities, regardless of how long they rent the home. A significant shift from the conventional rental arrangement is the concept of rent-to-own, a rental contract in which the tenant can eventually own the house at the end of a defined period. 

A rent-to-own arrangement allows tenants to rent a home with an option to buy the house at the end of a defined rental period. In the rent-to-own model, the tenant pays an additional deposit with each monthly rent payment, which goes towards the home’s purchase price at the end of the rental period.

Types of Rent-to-Own Schemes 

There are two primary rent-to-own arrangements: the lease-option and lease-purchase arrangements. The lease option allows the tenant to pay an upfront fee of about 5% of the house’s value. The upfront fee gives tenants the option to buy the home at the end of the rental period at a price to be agreed upon between the buyer and the seller. The upfront fee paid by the tenant is considered in determining the final cost of the house. The tenant agrees to make monthly payments a little above the market rent rate for the property. The excess payments above market rent go towards the down payment for the property purchase. On the option exercise date, the rent credit serves as a down payment to enable the tenant to purchase the home. The tenant retains the right to opt-out of the agreement if s/he decides not to buy the property.

On the other hand, the lease-purchase is a type of rent-to-own arrangement where the tenant and property owner agree on the price of the property upfront. The tenant makes monthly payments above the market rent rate, and the excess goes into equity ownership of the home. In a lease-purchase agreement, the tenant is obliged to purchase the home at the end of the lease period and loses the down payment if the tenant fails to provide funding to purchase the home. Furthermore, the property owner can sue for breach of contract if the tenant fails to purchase the home at the end of the lease period.

While the lease-option agreement gives the tenant more flexibility in the home acquisition process, this arrangement presents uncertainty in the final home price as the price is determined at the end of the lease period and may be above the tenant’s budget. On the other hand, the lease-purchase lacks flexibility for the tenant in cases where tenants decide to change their mind, but the risk of property price increasing above the tenant’s income is minimized.

Rent-to-Own Scheme

Home Maintenance and Insurance

In a rent-to-own arrangement, the prospective homeowner is both a tenant and a buyer. Prospective homeowners, therefore, have more responsibilities in a rent-to-own scheme than they would in a traditional rental arrangement. Unless the agreement states otherwise, the tenant is responsible for maintenance work in the home. Some rent-to-own agreements assign major maintenance works to the seller, such as changing roofing and other structural works. However, maintenance works such as house painting, replacement of sinks, and landscaping are usually the responsibility of the prospective homeowner under a rent-to-own arrangement. 

Different types of home insurance types are available to protect residential properties and contents. A renter’s insurance covers the tenant’s personal belongings, while a landlord’s insurance offers homeowners protection for rented properties. Since tenants build up equity in a house over a while, albeit on paper, it is crucial to ensure that the property has an insurance cover to protect the tenant’s investment under a rent-to-own arrangement. Because the seller owns the property in a rent-to-own agreement, the seller usually carries homeowner’s insurance while the parties agree on how to share the insurance cost. On the other hand, the tenant may acquire a renter’s insurance to protect belongings in the home. 

The Ideal Rent-to-Own Candidate 

Rent-to-own arrangements could offer an ideal solution for both tenants and landlords. Rent-to-own is a good choice for tenants who wants to buy a home but does not have the initial deposit or qualify for a mortgage. Tenants get the opportunity to move into a home and start enjoying the benefits of a homeowner while building up equity over time. 

The Benefits 

In addition to allowing tenants to build equity in the home over a period, tenants have the flexibility to walk away from the arrangement if their financial situations change or if they lose interest in purchasing the home. The rent-to-own scheme allows property owners to sell their properties while gaining rental income in the interim. Property owners also enjoy long-term reliable tenants and lower home maintenance costs.

Increasing Homeownership Rate Through Rent -to-Own scheme 

As previously indicated, affordability remains a major hindrance to delivering housing solutions in Ghana. On the one hand, the mismatch between the cost of houses and mortgages and the income levels of potential homeowners in the conventional homeownership model remains a significant hindrance. The more flexible rent-to-own schemes have the potential to move many potential homeowners up the property ladder, thereby increasing the homeownership rate substantially.

Creating the Enabling Environment for Effective Rent-to-Own Schemes 

A fundamental logic behind rent-to-own is to provide a cheaper, more affordable alternative path to homeownership for persons who cannot afford conventional mortgages from banks.

However, the high cost of housing units – even those labelled ‘affordable’ – is a challenge to the rollout of rent-to-own schemes, as the property costs impact the rental charges. Higher house prices translate into high monthly rent-to-own payments, pricing out target candidates. Currently, at the typical prices of ‘affordable’ houses, the difference between monthly rent-to-own rates and typical monthly mortgage obligations tends to be relatively narrow. In effect, many low-income potential homeowners for whom the rent-to-own path should have been beneficial, i.e., a cheaper alternative to mortgages, end up unable to afford this alternative route. 

For rent-to-own schemes to increase the homeownership rate, especially among low and middle-income earners, a supportive cost and regulatory environment must exist to ensure such schemes are affordable and sustainable. Invariably, government intervention is necessary for the creation of this supportive environment.

The specific government interventions below are sine qua non to ensure stable, affordable house prices and, by extension, affordable rent-to-own rates: 

1. Provision of low-cost land banks, eliminating the high costs of private land acquisition and the associated costs of multiple payments for the same piece of land, the menace of ‘land guards’, etc.;
2. provision of communal infrastructure (access roads, drainage, electricity, water), the costs of which are presently borne by private estate developers and thus built into house prices;
3. provision of construction financing at concessionary rates, as the burden of expensive bank loans also adds to the unsustainable cost build-up of even the houses that are intended to be affordable. 

The applicable rent laws must also be amended to accommodate the rent-to-own concept. This amendment is essential to protect both rent-to-own providers and subscribers. The rights and responsibilities of parties under rent-to-own schemes must be duly covered in the regulations to prevent scheme providers from taking advantage of vulnerable subscribers and vice versa and provide a regulatory framework for the transfer of title and dispute resolution. 

Beyond government intervention, estate developers should also explore lower-cost construction technologies and materials without compromising quality. 

Conclusion  

With most residents in urban areas engaged in some form of rental arrangement, a scheme that will enable tenants to transition into homeowners will positively impact homeownership rates in Ghana.

The rent-to-own model presents a huge potential to increase homeownership and the delivery of affordable housing to meet growing demand. Potentially, the scheme can move people who would otherwise not qualify onto the homeownership ladder. The resultant increase in demand for affordable housing will spur developments to satisfy the demand.

Governments and non-governmental organizations have initiated several interventions to increase housing delivery and uptake, especially among middle and lower-income earners. For these interventions to achieve the intended impact, challenges surrounding housing affordability must be addressed critically, especially in the current environment where a huge disparity exists between income levels and home prices.

Successful implementation of rent-to-own schemes would hinge on the supportive inputs of stakeholders, especially the government. The government must facilitate the enabling environment through regulation, provision of affordable landbanks, provision of necessary infrastructure, and funding for research into the use of local materials to develop high-quality but affordable houses. Proper implementation of the rent-to-own model will fill a critical gap in the housing market, facilitating ownership access for the market segment that cannot afford traditional mortgages.