By McPherse Thompson, Staff ReporterTHE ISLAND'S primary private mortgage lending institutions said that although the monthly repayments on housing loans were relatively high when compared with the remuneration of the average Jamaican worker, it would be unsustainable for them to lower those rates because of the high costs to fund the loans.
At the same time, building societies canvassed said there was no collusion between them to set monthly payment rates and that the method of computation used to calculate the repayments were based on the reducing balance technique which worked out better for consumers.
The Financial Gleaner had asked building societies to provide a range of data on mortgages, against the background of concerns about the high monthly payments, the required income to qualify for mortgage loans, and the total amount consumers have been required to pay by the end of the loan terms.
However, vice-president for mortgages at the Victoria Mutual Building Society (VMBS), Gavin Lowe, sums up the sentiments of that and other mortgage institutions as to why they could not offer loans at the same rates as the state-owned mortgage institution, the National Housing Trust (NHT):
"The NHT obtains its funds from compulsory savings from employees, plus a three per cent grant from employers. The NHT pays back the contributors after seven years at a very low interest rate. So they have a steady source of funds for seven years and the employers' contribution is not returned. On the other hand, we have to get funds at market rates and we have to pay returns on those funds."
The Financial Gleaner had asked the VMBS, the Jamaica National Building Society (JNBS), CIBC Jamaica Building Society, and Scotia Jamaica Building Society (SJBS) to provide certain data, based on a loan to finance a mortgage on a house valued at $3.2 million, the average cost of a middle-income dwelling.
According to the building societies, the typical initial deposit, which is set by the vendor of the property, is usually about 15 per cent, which would mean an up-front payment of $480,000 on a $3.2 million house. However, another 10 per cent of the cost of the dwelling would be required to be paid for closing costs, which may involve transfer costs, registration of the mortgage, a valuation report, and a surveyor's identification and could therefore mean the buyer has to find an additional up-front payment of $320,000.
The building societies said they would be prepared to lend up to 80 per cent or some $2.56 million of the purchase price, with CIBC Building Society saying that it would lend up to 75 per cent of the purchase price or forced sale value, whichever is lower.
Interest rates applicable to the loans varies, with JNBS, at 14 per cent, currently offering the lowest rate for first time purchasers of a residential owner- occupied property. VMBS' rate range between 17 per cent and 21 per cent depending on whether the borrowers are savers or non-savers, CIBC Building Society from 18.75 per cent to 19.25 per cent, and SJBS from 17.75 per cent to 18.5 per cent.
The building societies said interest payments are amortised, that is, they are based on the reducing balance, and are neither add-on nor compounded. This means that the monthly payment is constant, but the interest amount reduces with each payment, while the amount applied to the principal increases with each monthly payment, explained Mrs. Thelma Cooke-Wallace, manager at CIBC Building Society. All the building societies agreed that the reducing balance method is more advantageous to customers, although, according to mortgage supervisor at JNBS, Keisha Melhado, the principal repayment is insignificant and interest payments reduce negligibly in the earlier years of the mortgage.
All the building societies offer loan terms of between five and 35 years with monthly repayment ranging between just over $35,000 to more than $64,000, depending on the life of the loan and the percentage rates at which it is being financed.
The rates provided by JNBS provides an example:
For first-time homeowners accessing a loan of $2.56 million at a rate of 14 per cent for 25 years, the monthly repayment would be $35,658. The monthly repayment figure increases as the loan term decreases and the percentage increases. For a five-year mortgage at VMBS, the total monthly repayment at 17 per cent would be about $64,210. To qualify for JNBS' 25 year loan, an individual or individuals combined to access the loan would be required to be earning a minimum of $106,974 per month, while in the case of the five-year loan at VMBS, the individual or individuals combined would be required to be earning a minimum of $214,000 monthly.
PAYMENT
The convention, as provided by Miss Melhado, is that the monthly payment to total income ratio should be 33.3 per cent, regardless of the number of applicants. In other words, combined gross income should be at least three times the monthly payment.
However, Miss Melhado explained that among the components of the monthly payments were property insurance, life insurance premiums, and upkeep savings on which the borrower earns interest and which goes towards maintenance of the property.
The building societies provide data which shows that, based on a house valued at $3.2 million, the total principal and interest repayable, to CIBC Jamaica Building Society over 25 years, would be about $11.4 million; at JNBS, assuming an interest rate of 14 per cent, the total repayable would be $9.24 million; at VMBS, about $11.1 million based on its lowest interest rate.
JNBS said that if a mortgagor decides to repay the total amount borrowed before the expiration of the loan term, penalties of three months' interest in lieu of notice would be applicable, and six months interest if it is repaid within the first year of the loan. CIBC Jamaica Building Society said there would be no penalty if three months' notice is given, but penalty of three months' interest would apply if no notice is given and the borrower is closing before five years.
Despite the relatively high monthly payments, CIBC's Mrs. Cooke-Wallace has suggested that people aspiring to own their own home should not put it off. "Mortgage for home purchase is the single most important investment any person will make," she said. "Start with a smaller house than you really want. This can be sold later when the value increases. Then you will have equity in the house (difference between sale price and mortgage balance which has reduced) and (you will be) better able to purchase your dream house."
According to Mrs. Cooke-Wallace, "it is important to know what savings interest rate is being paid on your deposit. What may look like a good mortgage rate may really cost you more if your savings earn little."
Similar sentiments on home ownership were expressed by Mr. Lowe of VMBS. "One has to start budgeting and planning from very early. You might not be able to get your dream house now, but it makes sense to start off small. And don't despair," he said.
