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Rate hike shakes up real estate

Saturday, March 5, 2016

Bank and mortgage company executives are not surprised at the increase in the mortgage market reference rate (MMRR) to three per cent. 

They told the T&T Guardian it was to be expected given the recent increase in the repo rate and overall decline in liquidity.

Earlier this week, the Central Bank announced that increases in both the 15-year Central Government Treasury yield and commercial banks’ cost of funds had resulted in the MMRR for March 2016 rising to three per cent from 2.75 per cent in December 2015

“Commercial banks and their affiliated non-bank financial institutions are expected to apply the MMRR plus a margin to all existing residential mortgage loans that are due to be re- priced as well as new mortgages granted from March 1, 2016,” the bank said in a statement.

“The margin will be negotiated between the commercial bank and customer. The margin takes into account the customer’s credit rating, the location of the property, the size of the down payment and the size and quality of collateral.”

Ingrid Lashley, managing director/CEO T&T Mortgage Finance Company Ltd (TTMF), is predicting that the increase will have a negative impact on the real estate market. 

“As the pricing of mortgages increase, affordability is compromised, delinquency increases and ultimately real estate prices would fall in order to ensure sale of properties. But the timing may be extended depending on the acceleration or otherwise of the increase in pricing,” she said.

“The mortgage market is already competitive among financial institutions, in particular, commercial banks, thus, while the pricing or interest rate is relevant, mortgagors must pay attention to other terms and conditions in evaluating the ‘full’ cost. There is need to consider variation in interest rates in an increasing interest rate environment, penalties for lump-sum payments, or early repayment and other provisions of lending that may constrain the mortgagors' flexibility in determining the all-in cost of his/her mortgage.”

Lashley said TTMF is not a part of the MMRR pricing procedure and therefore offers more stable interest rates. 

She explained: “The nature of the terms and conditions of mortgage financing does not leave much room for negotiation given the long-term nature of the obligation. The customer would have signed a loan agreement that binds him/her for 25-30 years with provisions for change that are not very flexible. 

“Notwithstanding, the opportunity for renegotiation should be considered in the face of circumstances that may be to the detriment of both parties in the transaction. Foreclosure, where there are limited possibilities for resale, suggests that the financier should make every effort to work with the mortgagor to reschedule or rewrite the loan before the sale by mortgagee is actioned.”

Overall, she said, in times of an increased MMRR rate, “salaried persons and those who are beneficiaries of affordable housing that are most impacted.”

“The Government’s proposed housing finance policy, which includes the establishment of T&T Mortgage Bank, will allow for a more stable interest rate environment which will redound to the benefit of the low and middle income home owners,” Lashley said.

Managing director of Scotiabank Anya Schnoor said once there is upward movement in the interest on 15-year government bonds and the average of deposit rates in the banking system the MMRR will increase. 

She the rate is the benchmark rate, so “increases of course would translate to increased rates on both existing and new variable rate mortgages in the market.”

“While the increase may impact some existing mortgage holders the demand for homes continue to be robust and one might expect that new mortgage prospects may shop around for the most competitive offer,” she said

“The MMRR is not new and has been in existence since 2011. The market has come to expect movements in mortgage pricing vis a vis changes in monetary policy and economic realities. This recent change is also not the first time the MMRR has moved upwards and in fact it was last reviewed in December 2015 where it also increased.”

Schnoor added: “At Scotiabank, we believe our customers have the right to become better off, and encourage customers, existing and potential, to speak with our home financing specialists to determine their best options.”

The next MMRR announcement is scheduled for June.