Aligning Supply and Demand for Low-Cost Housing in Nicaragua Using a Multi-Tiered Financing Approach

Using a rent-to-own model, low-income populations are gradually given access to formal mortgage markets. The increased formality in the sector leads to private sector investment and higher quality homes. 

07.16.2015
 
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Objectives

  • Encourage private sector investment in low-cost housing sector
  • Increase low-income segment’s access to mortgage markets
  • Align supply and demand for low-cost housing

Summary

The housing sector in Nicaragua is defined by high levels of informality. It is estimated that out of the 20,000 homes build every year, only 3,000 are built through the formal market. The lack of formality in the market affects the quality of construction and puts future housing planning and policy in jeopardy. The houses built in the informal market lack clear land titles and lack access to basic utilities and infrastructure. This informality is a result of many interacting factors including the lack of formal mortgage lending schemes for low-income communities that leads to a restricted level of private investment in formally constructed, low-cost housing. In order to respond to this need, the Inter-American Development Bank (IDB) set a mission to increase demand for formal housing by bringing access to credit to low-income communities, thereby attracting more private sector investment into the low-income housing segment.

This mission was accomplished through a joint scheme between the IDB, the commercial bank, Banco de Finanzas S.A. (BDF), and the financial services company known as RAFCASA. The IDB approved a $10 million USD loan to BDF to finance a pilot housing project that will help low-income people gain access to mortgage financing. The scheme is made possible through the interaction between RAFCASA and BDF.

RAFCASA begins the process by prequalifying families for the mortgages eventually offered by Banco de Finanzas. These families are often working in the informal sector or are self-employed and represent approximately 75% of the population in Nicaragua. RAFCASA offers these families a savings scheme where customers can begin by occupying a home using a rent-to-own payment model. This two year rental period helps clients to build a credit history and a portion of each month’s rent is put into a separate fund that will be used to make the eventual mortgage down payment. After this two year rental period, clients have the option to assume a mortgage loan from BDF to complete their housing payments.

Results

Low income families build credit history, learn how to save and make timely payments, and gain access to formal mortgage markets. Commercial banks such as BDF benefit from prescreening and minimize the risk of default from their low-income clients. Private-sector real estate developers can be confident that more people will be able to afford low-cost homes and can begin investing in low-cost housing.