The Ultimate Mortgage Guide (July 2007)
Contents
· Mortgage and Finance
· Getting the Right Mortgage
· Mortgage Process - Who does What
· Fixed Rates & Variable Rates
· To Build or To Buy
· Mortgage for Non-Residents
· To Remortgage or Not To Remortgage, That is the Question
· Mortgage Costs
MORTGAGE AND FINANCE
These are happy times for new mortgage borrowers on the island and the much-maligned lenders deserve the highest praise for their enterprise and vision. Not all lenders have embraced the spirit of competition and innovation, but those that have will reap the long-term benefits and ultimately capture a bigger slice of the mortgage cake.
Mortgage interest rates for new business continue to be driven down, and following the Royal Bank of Canada's lead in dropping their rate to 6% two months ago, Scotiabank (5.85%) and Bank of Butterfield (5.95%) responded by lowering the goal-posts even further. In addition both have offered attractive cashback incentives, and thrown down the gauntlet to their rivals to better their enterprise. Now the FirstCaribbean have taken up that challenge with an exciting new 5.75% rate.
Low interest rates continue to capture the mortgage headlines, but inevitably it is the terms and conditions of each loan that determine the most suitable product for a prospective borrower. Different strokes for different folks is a well-worn cliché, but very relevant in the current mortgage climate given the availability of repayment terms up to 35 years, interest-only options, fixed rates, 100% facilities, cashbacks, removal of some fees and a bevy of incentives under consideration. Existing borrowers may lament their inability to access such attractive products, given the punitive costs to switch lender, but their day will surely come as lenders and mortgage brokers grapple with a new product that could ignite the sleeping giant within the mortgage industry.
In the midst of all this lively mortgage activity, the buoyant Barbados property market has continued to expand and prosper with a plethora of new projects under construction and clear evidence that property values have continued to increase. Some realtors have been sending out different messages in this respect, but in a business where property values can start at around BDS$30,000 and rise to over US$30 million, there are serious challenges in trying to generalize.
Barbados real estate is a complex animal given the great geographical variations of West Coast versus South Coast, beachfront versus inland, rural versus urban, traditional versus new, wood versus concrete, detached versus condo and large versus small. Little wonder every real estate agent speaks from a personal perspective, and in the absence of authentic industry records perhaps there's some truth in every opinion. Certainly the relevance of including multi-million dollar land lots and new luxury villas on the new Green Monkey golf course in the same statistics as mid/lower-range developments like Baker's Wood and Platinum Heights is a cosmetic exercise that doesn't tell the full story of Barbados real estate.
Supply and demand is the ultimate test of any business, and the record mortgage figures confirm a buoyant property market, fuelled to some extent by the weak US dollar that has brought overseas investors and returning nationals flocking to the island. It won't always be so rosy, so make hay while the sun shines!
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GETTING THE RIGHT MORTGAGE
The most frequently asked question in the mortgage process is "How much can I borrow?" but in reality the applicant already has the answer. Most borrowers have a budget that fits comfortably into their income/expenditure, and only a small minority will want to borrow above their means. Of course all lenders have a mechanism in place to ensure they don't, and in general terms this usually means the proposed mortgage repayment should not exceed a third of their available income.
Getting the right mortgage is an important part of the buying process and it would be naive to think that the choice came down to the lowest interest rate in the market place. Interest rates are a dynamic in the business and the lowest rate to-day can easily be bettered by a competitor tomorrow. The real test is to align with a lender who is competitive at all times, and offers innovative and attractive products on top of a quality customer service.
The major players in the local mortgage market are banks, insurance companies, and credit unions, with the former controlling the bulk of the market. The most common mortgage product is the capital-and-interest repayment loan, with fixed rates and interest-only options slowly entering the frame. Repayment terms can be as long as 35 years, mortgage interest rates can vary from 5.85% to 10%, and all lenders have costs and fees, some not very transparent. The cost of land loans and bridging finance where construction is involved is higher than the mortgage rate, and the amount you can borrow can be as high as 100% but is generally limited to 95%. Mortgage loans are available to non-residents, usually through a US$ mortgage product with a loan-to-value limit of 70%, and residents must have three years continuous residence to qualify for a local mortgage. Purchases can be made in individual names or properly incorporated single-asset non-trading property-holding companies.
Therein lies the challenge to get the right mortgage to suit your needs and with approximately ten lenders in the market, that can be a daunting task.
All applicants have two options, either to go direct to a potential lender, or to seek the advice of a competent financial advisor. The latter route will usually incur a professional fee, but in most cases it should save the client money, it will ensure they get independent advice, and all the application forms/processing can be dealt with by a professional acting in the client's interest. Mortgage brokers are thin on the ground in the Caribbean and the business is not regulated, so prospective borrowers should satisfy themselves on the competency of the service being offered, and the experience and knowledge of the person providing it. Only then can they decide whether the fee they are being asked to pay is worth the potential saving in time and money.
Getting the right mortgage is a fundamental part of property purchase process and the difference between the most and least favourable mortgage can amount to thousands of dollars. A fee paid to a competent independent financial advisor will be small beer set against the potential savings, and for non-residents using a mortgage broker on the ground is almost obligatory given the wide range of customer service levels and professional competency in the local market place.
Repayment terms can be as long as 35 years, mortgage interest rates can vary from 5.85% to 10%, and all lenders have costs and fees, some not very transparent.
Getting the right mortgage is an important part of the buying process and it would be naive to think that the choice came down to the lowest interest rate in the market place.
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MORTGAGE PROCESS - WHO DOES WHAT
It may not be rocket science for those in the business, but for those who are not, the mortgage process can be a daunting experience. It should not be the case, but for many years the workings of banks, lawyers, real estate agents and valuers was a one-off learning experience that many purchasers never wanted to repeat, not least because in numerous instances they got it wrong from the outset. This comes at a cost, and unfortunately for the customer is it almost totally at their end.
It is therefore vital to know who and what is involved in the mortgage process and take the proper steps to ensure your interests are at the top of your priority list and not seconded to any other player in the process. Remember you are the purchaser that provides the funds for the vendor, the ensuing sales commission for the selling agent, the valuable loan business to the lender, the insurance business, and all the fees to the valuer, lawyer and broker.
You are the most important person in the process!
Here are the key players in the process and their roles;
| 1. | FINANCIAL ADVISOR
It may be your friendly bank, broker or best friend, but chose wisely as this individual holds the key to getting you the right deal at the best price. Make sure the person in whom you place your financial trust has the knowledge, expertise and experience to deliver the goods, as the wrong decision can be a costly exercise. A good advisor will provide independent advice and expertly guide you through the maze of financial options that tend to confuse many borrowers. Do-it-yourself financial advisors come aplenty in Barbados and more often than not, they get it wrong because they think getting a loan equates with getting the right loan!
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| 2. | LAWYER
Your lawyer is a key person in the mortgage process as he or she handles the contractual exchange involved in the purchase and works with the lender's lawyers where a mortgage is involved. The process can therefore involve three sets of lawyers and has been notoriously slow and frustrating in Barbados. That said, the best lawyers will still provide a quality customer service by keeping their clients informed, moving with both efficiency and expediency, and being proactive rather than reactive. Although legal fees in Barbados are set by legislation, lawyers have some flexibility in what they can charge, and you should always ask for a quote up front.
Select your lawyer very carefully and ensure you pick a person with both the expertise and track record to deliver.
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| 3. | LENDER
Your financial advisors will either guide you to the most suitable lender, or in the case of many Barbados property purchasers it may even be the lender. Going straight to a lender is a gamble as it eliminates independent financial advice and effectively places total trust in the advice of an agency that has their interest above yours. You may be lucky and get it right so the risk can be justified, but you are never going to be told of a better offer elsewhere. Most lenders have very capable mortgage advisors, but not all, and if you go down this route be prepared to ask plenty of questions or you may find when it is too late that the direct route has been a costly experience.
A good lender will provide quality advice, a suitable product to meet your particular needs, excellent customer service before and after, and establish a bond of mutual respect. It is vital that the lender delivers on all fronts.
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| 4. | REAL ESTATE AGENT
Most property purchasers will use a real estate agent in their search for a suitable property and the one you select should be competent, experienced, proactive and professional. If they don't have an office, they don't keep appointments, they don't advertise, they are difficult to contact, and they take you to properties that don't fit your requirements, then do they meet your expectations?
Barbados has a mixed bag of real estate agents and their sales commission is high, so only use those that measure up to your standards, and do your homework on them long before you make contact.
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| 5. | VALUER
All lenders will require a valuation report on the property to be purchased to ensure their interest is protected. Most lenders operate from their appointed panel and will instruct the valuer direct, but others will allow the applicant to make their own direct contact. However, applicants going this route should ensure that the valuer they select is approved by that lender, or they may incur two valuation fees.
Valuation reports, their quality, and the cost of them, differ widely in Barbados, so it is important to select a reputable qualified valuer with a solid knowledge of local property/construction, market values and a track record of competency.
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| 6. | INSURANCE ADVISOR
Buildings insurance advice can be provided by either an insurance company or a competent broker or agent. It doesn't cost the client anything extra to use a broker who will place their interest foremost and assess the market to get the best possible terms. All lenders will require evidence of buildings insurance being in place and some may provide it under a block policy.
Life assurance is often a condition of the mortgage but borrowers should always take proper advice to meet all their personal requirements, and not look at the mortgage in isolation. Life and health cover varies according to individual circumstances and it is vital that borrowers are advised by professionals in this field, and not see it as a lender's condition of the mortgage.
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FIXED RATES & VARIABLE RATES
The true value of a fixed rate is peace of mind and the bonus is securing a facility just before interest rates start to rise.
Local lenders have not extensively marketed fixed rates, but they have existed for some time as the lending terms with some products have included a provision not to change the rate for a specific time, usually three years. In more recent times at least one lender has offered both options, the three year fixed rate at 6.5% against a current variable rate of 5.85%.
There is no right or wrong answer to the question as to which is the best option, but for cautious borrowers who careful control their finances, the facility to accurately budget over a specific period is an attractive option. Mortgages interest rates in Barbados have been on a slow decline over the past decade but some experts feel there is still some slack within the current structure, while others feel the market has gone as low as it should to woo new business.
As always, competition may be the driving force, and while fixed rates may offer a comfort zone for the cautious borrower, the best deals may be significantly lower.
Only time will tell which option proves best.
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TO BUILD OR TO BUY
This is a question that has taxed many would-be buyers over the years, and there is no easy answer. The option to build is not one to be taken lightly, and given the increasing costs of construction and land over the last decade, the potential saving has been seriously eroded. Gone are the days when you could buy some cheap land and build your dream house well below the cost of purchasing a similar property on the open market. The gap has all but disappeared and depending on the quality of your finish, it may even be more costly to build than to buy.
Of course the building option is not one solely determined by cost, and the biggest advantage to be gained is the option to build exactly what you want where you want. In some instances this may be a straightforward decision if the land is already owned, but for first-time buyers keen to take their first step on the property ladder, they would be well advised to do their sums carefully before making a decision.
Buying land and building on it requires a full appreciation of the market value of the finished product, assuming the borrower has the knowledge and competence to manage a process that may involve an architect, the planners, a builder, lawyers, a lender, and a shrink if the stress proves too much!
Gone are the days when you could buy some cheap land and build your dream house well below the cost of purchasing a similar property on the open market.
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MORTGAGE FOR NON-RESIDENTS
There are very misleading messages out there on the availability of mortgages for non residents and in many instances advice given can be totally wrong!
To qualify for a local mortgage, Central Bank has determined that a person must have three years continuous residence. All potential borrowers who do not meet this criteria can only obtain mortgage facilities using a foreign currency product, usually though an offshore division of a local bank. The process is much more cumbersome than a conventional mortgage and specific conditions apply to the loan-to-value ratio, the currency involved, the repayment terms and the mechanism that determines the interest rate.
In recent times the US$ mortgage product has been particularly attractive, especially for UK and European nationals who have enjoyed the benefits of a strong pound and Euro, although over the past months there has been a slight increase in interest rates. Non-residents can fully utilize this product but they are well advised to have some form of representation on the island or they will face some costly telephone bills!
To qualify for a local mortgage, Central Bank has determined that a person must have three years continuous residence.
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TO REMORTGAGE OR NOT TO REMORTGAGE.THAT IS THE QUESTION
Until a suitable product is introduced to the local mortgage market, existing borrowers would be well advised to stay put with their current lender. This will be particularly frustrating given that new borrowers are being wooed everywhere with interest rates some 2% lower than those of many existing borrowers, the latter after many years loyalty and excellent credit pedigree.
In the more sophisticated and mature mortgage markets remortgaging/switching lender is a very viable proposition given the improved products that come onto the market, and the changing needs of borrowers. Historically Barbados has been a very conservative mortgage market with limited product, punitive mortgage terms and unfavourable conditions to switch lender because of the heavy legal costs involved. This has been very costly to the vast majority of local borrowers, and produced stagnation and discontent across the whole industry. There are many genuine reasons why a borrower might elect to switch lender, and it is grossly unfair that their business decision should be controlled by legislation governing legal fees, as this is the major cost of switching. In a non-competitive environment lawyers have set legal fees, and since the costs to switch are similar to the costs of a new mortgage, existing borrowers are unlikely to move, or if they do, incur a high cost for the privilege.
To put the matter into perspective remortgage business in the UK amounts to approximately 50% of the total business, and in the US much higher. In Barbados the remortgage market is almost negligible.
Some borrowers may be tempted to move by a lender that will add the costs to a new mortgage, or offset a cashback offer as an incentive, but these are high costs to pay to move. Adding fees to the mortgage is short-term gain and long-term loss, while sacrificing a cashback offer is at your cost not the lender's.
The ideal switch mortgage product is one where all the costs are met by those who profit from the business and not by the customer. This may involve a nominal fee for the switch, but it will bring integrity to the mortgage industry and give long-suffering loyal mortgagors some viable options and hopefully a better deal.
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MORTGAGE COSTS
It is vital that any prospective borrower has a full appreciation of the costs involved in securing a mortgage facility. These costs can differ from borrower to borrower depending on a number of variables, as rarely are two loans the same. Lenders have different terms and conditions, borrowers have different needs, and poignantly some mistakes are made that can prove costly.
The following costs are possible in respect of a mortgage
Legal costs
In addition to the normal legal fees associated with a conveyance, a local lawyer will normally charge a fee to deal with the mortgage and the client will also have to meet the legal fees of the bank's lawyer in the same respect. Although generalized quotes often state that legal fees are in the region of 1-3% of the purchase price, clients should ask the lawyer for a specific quote of all fees that are likely to be charged as this generalization can be very misleading and inaccurate.
Lender's fees
These depend on the lender's terms and conditions, and the specific circumstances associated with the loan. There may be an administration fee or negotiation fee to process the loan, a commitment fee if the funds are not taken up within a specified time, and a redemption/prepayment penalty if the loan is redeemed early. One hidden fee that can confuse borrowers is the mortgage indemnity guarantee premium, an insurance that protects the lender in the event of a repossession and usually comes into effect when loans are above 75% of the purchase price or valuation, whichever is the lower.
Survey/valuation
All loans will require a valuation report to be completed by an approved valuer and where the property is under construction, this may involve stage inspections and a series of stage payment fees. The cost of a mortgage valuation report can vary as not all valuers/surveyors are cloaked under the same fee structure, so it is best to clarify the fee prior to an engagement, especially with properties at the top end of the market.
A structural report will usually be completed separately by a suitably qualified professional in that field and is unlikely to be used for mortgage valuation purposes.
Mortgage broker's fee
The mortgage broker's fee is usually 1% of the loan secured and payable on procuring the offer letter from the lender. A competent broker will provide a clear outline of the services provided, the potential savings and act solely in the client's interests.
Insurance
Buildings and life insurance is applicable in most local mortgage cases, and the costs vary according to individual circumstances. There are always options and borrowers are well advised to take professional advice to get the best deals.
Life cover is not usually a requirement for non-resident mortgages.
25 YEARS
CAPITAL & INTEREST REPAYMENT COMPARISON
MONTHLY REPAYMENTS |
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| Amount | Interest Rates |
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| 5·85% |
6·5% |
7% |
| $100,000·00 |
$ 635·16 |
$ 675·21 |
$ 707·00 |
| $300,000·00 |
$1,905·48 |
$2,025·63 |
$2,121·00 |
| $500,000·00 |
$3,175·80 |
$3,376·05 |
$3,535·00 |
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