Borrower’s risk and mortgage residential lending
Borrower’s risk in mortgage business refers to the uncertainties faced by the borrower when engaging themselves in mortgage. Mortgages are taken with an aim of acquiring residential houses and just like any other loans; they have to be paid back with a specified rate of interest which varies from one lender to the other.
In Saudi Arabia, mortgages are available to borrowers from all classes’ of people, only which they are not that easy to obtain. This brings about the link between the borrower’s risk and mortgage residential borrowing in the region. The borrower is expected to deposit a large amount of money as down payment before they are guaranteed of being provided with the mortgage.
The repayment period is also stated in short terms to ensure that the borrower is dedicated to clearing the debt. This saves the lenders from the problem of having to declare most of the debts as bad, owing to default payments on the part of the borrower.
From this, it is clear that residential mortgage lending refers to the process of providing funds to individuals or groups for the purposes of constructing residential houses. These funds are to be paid back within a specified period of time and at a specified interest rate.
At the expiry of the repayment period, the borrower is faced with the risk of having his property auctioned by the lenders so that they can redeem back their money. Before committing to take a mortgage, it is advisable for the borrower to have in place a payment plan that will ensure he is able to clear the debt within the specified time.
This will save them from the possible trouble of losing their property. The lending institutions have a way of assessing the financial abilities of their clients before deciding on the amount of money to invest in their projects. In Saudi Arabia, most of these institutions provide a short repayment period after which the property is prone to being auctioned (Mortgage and Housing Corporation 98).
This is a strategy that in addition to reducing the number of people committing to these mortgages, it also ensures that the few who obtain them are able to pay within the shortest time possible. This also ensures that they are able to recover their money more quickly hence being able to make more investments.
Relevant factors in the determination of borrower’s risk
It is always advantageous to the borrower if they ensure that they have sufficient and relevant information on any mortgage that they intend to take. This ensures that they acquire a mortgage that perfectly fits into their needs and financial capacities as well.
Borrowers obtain information from many sources the most common one being from other people who have taken the mortgage in the past. (Al-Rajihi Banking and investment Corporate, 92). This is one of the greatest risks in relation to loan information as individual needs vary from one person to the other. It is advisable to the borrowers to always seek the assistance of the institution from which they intend to borrow from as well as financial advisors before settling for a mortgage.
This will save them from the possible problem of being unable to repay the loan. Obtaining mortgage information directly from the lender institution an aspect of certainty to the borrower and ensures that he does not rely on assumptions.
Relying on assumptions is an indication of poor financial habits which places an individual under high risks of losing their financial resources (Starke et al 23). The best way therefore to reduce borrower’s risk is to obtain all the relevant information from relevant sources. This will enable the borrower to reduce the chances of losing their property to investors.
The risk faced by the borrower is also determined by the property being acquired. Just like the loan information, most people are in the habit of emulating from their peers the type of property obtained through mortgages. Most people go for something because they have seen someone else with and this too is an indication of poor financial habits.
It is important for a person to obtain relevant information on the property they intend to acquire so that they can measure the value of the property in relation to their financial capacity. Taking mortgages on high cost properties most of the times proves detrimental to the borrower since it becomes difficult for them to clear the loan and this means that they risk losing the property (Arab investment bank 78).
In Saudi Arabia for example, the idea of giving the borrowers a short payment period is to ensure that they take up loans that are within their financial capacities. The borrower is therefore expected to obtain accurate information on the property they want to acquire as this will reduce the risk of acquiring a high cost property and being unable to clear the payments.
This relates to the lenders who are expected to assess the financial capacity of the borrower and advise them accordingly on the amount of loan they should invest in a mortgage. The lenders are experts in this since they have an experience with many borrowers and this ensures that they are in a position to tell the credibility of the client in terms of whether they can pay up the mortgage in time and without having to extensive greater miles to do the same.
There are people who borrow loans to repay other loans and this is not advisable in a mortgage situation. After acquiring a house on mortgage, there are people who use the house as security for the loans that they use to pay these mortgages.
Therefore, the house is still at risk in fact twice at risk since if the money borrowed is not enough to pay the loan, then the mortgage lenders might need to redeem their money by selling the house and the lenders of the other loan might also need to redeem their money from the same property. This is why the mortgage lenders should access the financial background of the borrower before deciding on the amount of money to allocate to their project if any.
Relationship in the three types of borrower’s risk and residential mortgage lending
These three classifications of borrower’s risk and residential mortgage lending are related in the sense that they all meant to reduce the rate of risk faced by the borrower and the lending institution as well. Borrower’s risks affect the lenders directly in the sense that the borrower defaulting to pay the mortgage leads to a loss on the lender’s part (Saudi Arabian Monetary Arabian 92).
The risks brought about by lack of efficient borrower’s information lead to misrepresentation whereby the client is not advised by the lenders accordingly and the lenders also end up creating a problem for forcefully getting back their debt. Effective risk assessment in all the three cases is therefore important since it reduces the level of uncertainty on both the lender’s and the borrower’s side.
In Saudi Arabia, these are the things that made the mortgage lending authorities to place barriers restricting the number of borrowers. These ensure that only the most credible clients are able to obtain the loans and even so, they are still given restrictions in terms of the period over which they should repay the loan.
This prevents them from taking huge mortgage loans that might prove difficult to repay. Being an Islamic country, the law prohibits any person from being treated in an inhuman way and so any institution that decides to offer mortgages should minimize the chances of payments being defaulted.
How these relationships differed before and after the global financial crisis.
Before the global financial crisis, Saudi Arabia was performing well financially and the living standard of the citizens was considerably high. Most people could afford obtaining the high cost loans and the lending institutions were always guaranteed of getting back all their money together with the amount of accumulated interest.
The recession however messed up a lot of people as the rate of inflation and unemployment increased in the region just like in most other parts of the world (Starke et al 343). Most people could no longer be in a position to obtain mortgages and this created a residential housing crisis in the region. Lenders had to be cautious since they had also declared many debts as bad during the recession and this was detrimental to the institutions.
Saudi Arabia is a nice place to invest especially in the residential housing business. Owing to presence of oil wells and mineral deposits, the region has attracted a considerably high number of foreign investors. The high cost of obtaining mortgages is a detriment to many low and middle income earners who are hence unable to own their own property.
As finance manager in a bank, I would therefore advice the entrepreneurs to invest as much as they can in the residential houses since the market for this is high and increasing by the day. Consequently, a good entrepreneur is always willing to take risks, this is a good investing opportunity that will not only increase their income but also solve the country’s housing problems.
Al-Rajihi Banking and Investment corporation. “Real estate mortgage investments”. Investment reports and records. Connecticut, n.d. Web. 12 May 2011.
Arab investment bank. “Saudi Arabia plans on mortgage institutions” Islamic Finance.de. Saudi News posts, 6 Jan 2009. Web. 12 May 2011.
Mortgage and Housing Corporation. “Saudi Arabia”. The Saudi Gazette. Jumada Al-Akhir. n.d. Web. 12 May 2011.
Saudi Arabian monetary authority. “Housing projects spur economic growth in Saudi Arabia” Weekly Press release. IRR Middle East, n.d. Web. 12 May 2011.
Starke, John W, and Arlene K. Starke.Mortgage Lending and Investing: Understanding Risks in a Changing Market. Homewood: Business One Irwin, 1991.