Competition Among Banks Reduces Mortgage Loan Interest Rates

RIO DE JANEIRO, BRAZIL – With competition among banks, in a scenario with a basic interest rate (the Selic) at its lowest historical level, interest rates on mortgage loans are dropping. Among the five largest banks, the minimum rate varies between 7.30 and 7.99 percent per year.

On October 8th, following private banks, the Caixa Econômica Federal announced a reduction of up to one percentage point in interest rates for real estate financing with funds from the Brazilian Savings and Loans System (SBPE). The lowest rate dropped from 8.5 percent to 7.5 percent a year; and the highest from 9.75 percent to 9.5 percent a year. The new rates will apply from today, October 14th.

Pedro Seixas, professor of the Getulio Vargas Foundation (FGV) and a specialist in the real estate market, says banks have “awakened” to real estate credit due to housing demand. “It is a line of credit that creates a long-term relationship with the client and has real collateral that is the property itself. It is a very interesting credit also for banks and they have awakened to this mode and are competing more for the market,” he said.

According to Seixas, there is still room for reducing interest rates, not only due to the influence of the Selic reduction but also to the line of credit corrected by inflation, introduced by the Caixa Econômica Federal.

The new line has a credit balance corrected by the Broad National Consumer Price Index (IPCA). In this financing, the minimum rate is the IPCA plus 2.95 percent per year and the maximum is the IPCA plus 4.95 percent per year. In the other modes, the correction used is the Treasury Reference Rate (TR). “This innovation has the potential to have a great impact on competitiveness and, therefore, to reduce costs for families,” said Seixas.

Caixa leads the real estate financing market, with a 69 percent share.

Portability

According to the FGV professor, the reductions in interest rates encourage the portability of real estate credit. “The lower interest rates tend to benefit the portability of old contracts, with less interesting rates,” he said. However, before embracing portability, he recommends analyzing notary costs, the rate of the original contract and the time left to pay off the loan.

Interest rates

Santander reported that it began to reduce its mortgage lending rates in 2017. In July of this year, the third cut was made, with the lowest rate reaching 7.99 percent per year.

In late September, other banks made the cut. Bradesco announced a reduction in the minimum interest rate of its real estate credit line from 8.20 percent a year plus TR to 7.30 percent a year plus TR, with rates effective as of this month. In Banco do Brasil, the minimum rate was reduced to 7.40 percent per year plus TR. At Itaú Unibanco, the minimum rate was adjusted to 7.45 percent per year plus TR.

Despite the reductions, clients are not always able to obtain financing at the minimum rate because the bank appraises the client’s profile, the relationship history, the term of the financing, among other criteria, to define the rate. In addition, banks offer the lowest rates for new contracts or for portability cases, which is to transfer the contract from one bank to another, with more beneficial conditions for the client.

Experts advise clients to observe not only the interest rate but also the Total Effective Cost (TCO) of financing, which includes, in addition to interest, other costs such as insurance and administrative fees.

Types of real estate credit

The main types of credit at the present time have funds raised primarily from savings deposits by banks and other financial institutions that are SBPE members, consisting of the Housing Finance System (SFH) and the Real Estate Finance System (SFI).

The SFH is aimed at financing smaller properties and has part of these units financed with resources from the Severance Premium Reserve Fund (FGTS). This system is regulated by the Federal Government, which establishes conditions such as the maximum value of property appraisal equal to R$1.5 million (US$375,000) and the maximum effective cost equal to 12 percent a year.

The SFI is intended for high-end properties, without coverage by the FGTS and without government regulation.

In addition to these types and the new line with IPCA correction by Caixa, there is also the Pro-Quota-holder type of FGTS, offered by some banks. The Pro-Quota-holder is a line of financing that uses the resources of the Special Program for Housing Credit to the FGTS quota-holder. The program finances new and used properties and has a term of up to 30 years. To contract a financing plan in this line, an active account in the FGTS and a minimum of 36 contributions are required. If the account is inactive, a balance greater than ten percent of the property’s value is required.

Source: Agência Brasil