The assistant minister in the ministry of finance and development planning, Keletso Rakhudu, says equity contribution on mortgage housing loans is a responsible way of lending money.
He was responding to a parliamentary question raised by Palapye MP, Moiseraela Goya, who urged government to scrap the 20 percent down payment required by the commercial banks on mortgage housing loans.
He believes down payment is “unacceptably high” and it deters most Batswana from acquiring homes, especially at the height of the global economic crisis.
The assistant minister defended the arrangement pointing out that by imposing a 20 percent equity contribution the commercial banks were within the lending range and consistent with the traditionally recognised international norms.
“I do not consider the 20 percent owner’s equity contribution required by some commercial banks to be excessively high. Nor is it a deterrent to acquisition of houses or homes by Batswana.
“The size of the loan against the value of property, the so-called loan to value ratio, of 80 percent, is considered a prudent and safe lending practice, consistent with international norms,” Rakhudu said.
Mortgage loans, he said, are typically of a long term contractual agreements, ranging from 10 to 25 years adding property value during these periods could experience large fluctuations, depending, inter alia, on demand and supply conditions through economic cycles.
Further, he stated that the sub-prime mortgage crisis that started in United States of America, later spreading across the world under as the worst international financial crisis since the WW II, was ignited by the banks which were lending to customers who were not creditworthy.
“It must be noted that the recent global financial crisis was, among others, caused by unsecured lending by banks to finance the US housing market. Banks relaxed their lending requirements to meet strong demand for housing,” said Rakhudu.
He urged Batswana to learn from the recent crisis, particularly the causes of the crisis. He also encouraged citizens to save.
“Another important principle for requiring a 20 percent owner’s equity contribution is to encourage borrowers to have significant financial interest in the asset financed so that in the event of difficulties, borrowers do not ‘dump’ the properties financed on the banks which, if not properly controlled, could harm the safety and soundness of the banks and potentially cause banking instability.
While it is important to promote access to finance for owner occupied residential housing, government should carefully balance this noble objective with other policy objectives such as ensuring that access to credit is prudently managed and encouraging a culture of saving through acquisition of real assets.
Besides protecting both the lending institution and the borrower, a financial contribution enhances the commitment of both parties.
“Also, it should be noted that the higher the contribution by the borrower, the lower the repayment amount, hence this ultimately becomes a saving for the home owners,” the minister pointed out.
He said the Value Added Tax levied on facility arrangement fees on mortgage housing loans does not deter citizens from acquiring loans to purchase or build houses.
Continues the finance minister: “The provisions of section 11 of VAT as read with the second schedule thereto, provides for the exemption of VAT on some financial services including the granting of loans, negotiating loans, or dealing in loans, as well as the management of loans. What this means is that, the interest charged on the loans is exempt from VAT”.
However, fees, commissions or other similar charges are liable to VAT at 10 percent, Rakhudu acknowledges, arguing in the same vein that “these fees, commissions and other similar charges form a very insignificant portion of the loan amount, when compared to the interest levied on the loan itself.
“I therefore believe that the VAT levied on facility arrangement fees on mortgage housing loans cannot deter citizens from acquiring loans to purchase or construct houses,” he declared.
Premised on a wide tax base, the finance minister reminded Parliament that Botswana’s VAT rate of 10 percent is the lowest in the region, arguing “therefore if the fees for arranging mortgage loans could be exempted from the payment of VAT, then this could lead to revenue loss.
“As a result, government may be compelled to raise the VAT rate in order to recoup the lost revenue. A higher VAT rate would adversely affect the poor,” he stressed.
The unaudited VAT gross revenue collections for the 2008/09 financial year amounted to P4.8 billion, he noted, adding out of this figure, that a total of P1.2 billion was refunded to taxpayers in respect of VAT input tax, zero rated and exempted goods and services, resulting in a net VAT revenue of P3.6 billion or 75percent of gross collections.
A continued increase in the scope of zero rated and/or exempted goods and services from VAT would run contrary to the government’s twin objectives of widening the tax base and maintaining a lower rate of VAT.
“If that were to happen, it would negatively affect tax revenue collection. In this regard, we cannot afford further exemptions from VAT given the limited revenue accruing to government during these times of the worldwide economic recession,” Rakhudu said.