Rent-to-Own Schemes: A Route to Home Ownership for the Average Nigerian

Rent-to-Own schemes are a viable option for eventual home ownership without the burden of a sizeable lump payment. The scheme is not very well-known; however, it has been in operation for some years.  

The Rent-to-own (RTO) scheme is a contractual agreement between a renter and a property owner. In this scheme, the tenant initially rents a property for a specified period, with the option to purchase upon lease expiration, although some other contracts may mandate purchase. During the rental period, the tenant pays a fixed amount of rent, some of which is applied towards offsetting part of the purchase price of the property, if they decide to exercise their option to buy. The purchase price is usually agreed upon in advance and may be based on the current market value or set at a predetermined figure. 

The scheme aims to give renters a pathway towards eventual home ownership. Each monthly instalment is shared between the rent and a fixed amount saved as part of the down payment for the house. The tenant/buyer can apply for another financing option - such as a mortgage - to pay the outstanding balance for the house. This is payment at the end of the lease period.  

The benefits of rent-to-own schemes include: 

• Flexible and convenient payments that help the tenants plan their finances 
• An easier, long-term option for home ownership  
• Less risky than traditional mortgages, as people are not locked into long-term deals. 
• Rent payments also serve a dual purpose of contributing towards ownership. 
   

Building the Case for Rent-to-Own Schemes in Nigeria 

It is common knowledge that the majority of Nigerians are currently living below the $2-a-day poverty line and cannot afford decent housing. As of November 2022, the National Bureau of Statistics reported that about 133 million Nigerians are multidimensionally poor. This accounts for nearly 63% of the Nigerian population.  

A further 4 million Nigerians are purported to have fallen below the poverty line in the first half of 2023 (World Bank Nigeria Overview: March 2023). The poverty figures in Nigeria threaten to increase by 13 million or more Nigerians before 2025 if no interventions occur. The Statistics Bureau’s findings also show that 38.6 million Nigerians are experiencing some level of housing poverty. 

Furthermore, rising interest rates instituted by the Central Bank of Nigeria affect housing. The Central Bank has hiked the interest rate from 11.5 percent in April 2022 to 18.5 percent in July of this year. The Managing Director of the Federal Mortgage Bank of Nigeria (FMBN), Madu Hamman, discussed how the Central Bank’s rising monetary policy rates have negatively impacted Nigerians’ access to real estate investments and mortgages.  

The FMBN Director made these remarks through a virtual forum themed “Navigating Current Challenges in the Nigerian Mortgage Market”. Rising interest rates have a ripple effect on the mortgage market. Mortgage rates are reported to have soared from a 20-24 percent per year range to 24-27 percent. They also influence housing by raising the cost of construction with the climbing prices of raw materials. 

An example is the price of cement, which has risen from N3500 in January 2022 to N4700 in July 2023. This makes Nigeria’s housing deficit increasingly tenuous, as private individuals may struggle to build their own houses. Hence, the usefulness of the rent-to-own scheme. 

The Nigerian government is aiming to provide affordable housing by piloting rent-to-own schemes. This has been in operation and available to civil servants for decades at the federal and state levels. It has birthed the Federal Low-cost Housing Estates, and State Low-Cost Housing Estates, a few of which are situated in most major cities around the country. 

At the state level, an example of the rent-to-own system is the Lagos State’s Home Ownership Mortgage Scheme (HOMS). Federal Mortgage Bank of Nigeria has also propagated the scheme through the National Housing Fund (NHF). The scheme has also extended to the private sector, as some real estate developers have used it to market otherwise unaffordable homes. Notable real estate companies that have unveiled Rent-to-Own programmes in 2023 include Mixta Africa and FirstHome Mortgage Brokers. 

Conclusion 

We believe more property companies offering rent-to-own schemes in Nigeria will emerge with time, given the present economic circumstances. It is interesting to know that private business owners and self-employed persons with stable incomes are also able to benefit from this opportunity, as it has always been seen as a preserve of government employees. It has the chance to significantly reduce the difficulty of seeking decent and affordable housing, particularly in urban metropolises.