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BOB imposes ‘heavy penalties’ on prepayments of construction loans

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• Aims to make remortgage “very expensive”

• Bank manager: too many people use him for the “relay”

• Needs to find “crème de la crème” customers

By NEIL HARTNELL

Editor-in-chief of the Tribune

[email protected]

The Bank of The Bahamas imposes “heavy prepayment penalties” on construction mortgages in an effort to deter borrowers from treating such loans as a “bridging” facility to its detriment.

Kenrick Brathwaite, managing director of the BISX-listed institution, told Tribune Business that the policy was imposed “a few months ago” to make it very expensive for such borrowers to remortgage with a rival bank. as soon as the property in question has been completed.

He argued that such a decision was unfair to the original lender, who assumes the higher risk associated with financing new construction only to have its facility paid off sooner, while the borrower generally benefits from a lower interest rate. interest lower and higher after the mortgage. The bank taking over the loan also benefits from the lower risk associated with a completed property that has now appreciated in value.

“We have measures in place to try to stop the erosion of the portfolio and to try to get some growth over the next financial year, Mr Brathwaite told this newspaper, after the gross residential mortgage portfolio of the Bank of The Bahamas has declined. by 7% or more than $14 million in the year to the end of June 2022. “These are the easiest to try and fix.

The portfolio grew from $201.974 million at the end of June 2021 to $187.679 million some 12 months later. The post-COVID spike in building materials and construction costs has seen many commercial banks move away from issuing fixed-price mortgages for new builds, particularly as it is impossible to accurately determine the amount required.

Mr Brathwaite added that this reluctance has been compounded by the growing tendency for construction mortgage borrowers to instantly seek to refinance such loans with a rival financial institution immediately after completion in a bid to obtain more favorable terms and reduce debt service charges.

Some may view the imposition of penalties to deter such behavior as anti-consumer and a restriction of trade/competition, but commercial banks view construction mortgages as long-term lending assets that must be come with deposit liabilities to ensure they generate returns and remain solvent. Borrowers treating these loans as short-term bridge loans do not meet this requirement.

“I think the mortgage market has its own challenges. Some banks do not even grant a mortgage on the construction. If you want a construction mortgage, you will find that many banks have heavy prepayment clauses,” Mr Brathwaite told Tribune Business.

“Some people go to a bank and say another said no to a construction mortgage. They come to the Bank of The Bahamas, for example, get a construction mortgage, and when the building is mostly finished, go to the previous bank to pay it back.

“To control that, we have to impose heavy prepayment penalties so that if they try to move it, it will cost them a lot of money plus legal fees. The mortgage construction phase is a high-risk phase. You you have the ability to increase charges, you have the ability to increase import common costs, you have labor shortage issues, and you have bad weather issues,” he added. .

“That’s why construction mortgages are extremely high risk and therefore carry a higher rate. But, if you can pay off the mortgage, you can lower that rate by 50 basis points and you’ll be fine. Mr Brathwaite said that in addition to reducing their risk, borrowers who refinance construction mortgages early also gain a greater “equity position” in a finished property that is now “better worth” than at the start of the work.

“We started this a few months ago,” the head of the Bank of the Bahamas said of the penalties for early refinancing. “Some people have provided information, saying that was always the intention and then wanting us to waive the penalty clause. We’re saying we won’t waive the penalty clause; that’s what protects our mortgage for the future.

Mr Brathwaite, meanwhile, said allowing the Central Bank to restart commercial lending – a segment it has been banned from since 2014 after it nearly caused the bank to collapse – was key to rolling out its 179.226 million dollars in cash and Central Bank deposits for more productive operations. , higher yields.

This figure equates to more than 18% of the total assets of Bank of The Bahamas at the end of June 2022, with some $165.309 million – or 92.2% – of this sum held in non-interest bearing accounts at the Bank. central. This amount does not include the $27.23 million statutory reserve held by the regulator.

“You hit the nail on the head. This is exactly one of the reasons why we want to start commercial lending, because it will eat up some of the liquidity in the system,” Mr Brathwaite said. “Not all commercial banks in the Bahamas are willing to provide commercial loans, especially to small businesses. It’s definitely a space where we can operate and use some of that excess cash.

Noting that the Bank of The Bahamas and other Bahamian commercial banks had “taken the lead last year” when it came to covering COVID-related loan losses and deferrals, he added that all were showing now a higher or significant profitability.

Mr Brathwaite, saying he was ‘keeping his fingers crossed for better’ with profit for the 2023 financial year surpassing last year’s $11.218 million, said: ‘We are on the right track. Once we have structures in place and create consistent revenue streams, I think we will be fine for this year.

“We’re really going to focus on our mortgage portfolio. We will certainly do campaigns. We have reduced interest rates more according to the market. We will try to operate more efficiently in the area of ​​mortgages. We don’t have that kind of appetite for all mortgages. Mind you, if you look at delinquent mortgages and repossessed homes, you at least know what the market looks like.

“It’s not that easy to find these exceptional low-risk borrowers, but we have to do these things to attract the crème de la crème. I think the other banks have definitely gotten into this, and now we’re just catching up. »