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Banks respond to mortgage rate critics

Bermuda banks yesterday responded to residents’ concerns about mortgage rates being so high compared to other countries, pointing to such factors as higher costs and risks of lending on the Island. Butterfield Bank, providing a detailed explanation for the public, said there were a number of significant factors that influenced its 6.75 percent 30-year mortgage rate, currently the highest on the Island. “Principal among them is the higher cost of doing business in Bermuda which results in increased costs of administering credit facilities relative to other markets,” a Butterfield spokesman said. “In addition, high real estate prices in Bermuda necessarily result in higher loan-to-value ratios, which means that, in the event of a customer default, the potential losses incurred as a percentage of loan value are higher.” Butterfield further explained: “Local lending rates are also affected by the structural realities of the banking industry in Bermuda. “First, there is no ‘lender of last resort’ (ie, central bank) in Bermuda, so banks here must hold larger liquid reserves to support transactional activity. This means they are not able to loan out or invest as high a proportion of deposits as banks elsewhere. “In addition, unlike US banks, Bermuda’s banks do not securitise loans and mortgages, so cannot pass on lending risk to the capital markets. “Butterfield sets rates at competitive levels that allow the bank to offset the higher costs and risks of lending in Bermuda, and the more limited revenue opportunities that are available to us versus banks in some other jurisdictions.” When asked what influenced its current 6.5 percent 30-year mortgage rate, an HSBC Bermuda spokesperson gave the following brief explanation. “At HSBC in Bermuda, we regularly review all of our tariffs, fees and rates,” HSBC Bermuda said. “A number of factors are taken into consideration in setting these rates and fees including costs, risk, funding and competition. HSBC will continue to review to ensure our fees/rates remain competitive relative to the local market.” The banks were responding after numerous residents complained online about local mortgage rates in response to a story last week in which realtors said they were listing more properties that were either in or facing foreclosure as an unprecedented number of Bermudians slipped behind on their mortgage payments. One realtor said they’d seen more people having trouble paying their mortgages “in the past two to three years than we have seen in our history of real estate”. The banks confirmed they had seen an increase in the numbers of customers facing challenges paying off loans and mortgages. One resident complained: “Bermuda Banks get their money virtually for free and charge exorbitant rates in the current environment. The spread between what they pay in interest and what they charge is outrageous ... 3.5 percent rates in the States and 6.5 percent here.” Another commenter online charged: “Not once, since the recession began in 2008 have the banks helped the people, in fact, all they have done is STOP paying interest on our savings and, if I recall correctly, increased loan rates in 2010.” Someone else claimed: “Typically the spread in most western world countries ... is about one to two percent max. USA: CD rate 1.24 percent five years — Mortgage rate 3.42 percent five years (renewable); Canada — CD rate 1.70 percent five years — Mortgage rate 3.75 percent five years (renewable); Australia — CD rate 4.25 percent five years — Mortgage rate 5.51 percent five years (renewable); The list goes on and on and on.” Another charged: “The local banks are helping to drive the economy into the ground by not allowing people to refinance at lower rates.” Some, people though, defended the banks, one commenter saying: “Salaries at banks here are at least 50 percent higher than what they probably would be in the States. Higher costs means you have to charge higher prices to be competitive, just like a retailer or any other kind of business.” Another reader said: “If a Bermuda bank lends a mortgage at 6.25 percent to a local homeowner the loan is stuck on their books for the next 30 years and all they are getting is a 6.25 percent return, which isn’t that great compared to other opportunities for their capital.” Other commenters suggested you could ask your bank to convert your mortgage to US dollars instead of Bermuda dollars for a lower interest rate. They said Capital G may do this. In response, Capital G confirmed: “Capital G Bank provides US$ financing in Bermuda to qualifying customers. To qualify, the borrower must be able to demonstrate a long-term source of US$ income sufficient to meet the repayment obligations in accordance with the Bank’s underwriting standards. Interest rates for US$ financing are assessed on a case-by-case basis.” The current US 30-year fixed mortgage rate on Zillow is currently 3.42 percent, up 14 basis points from 3.28 percent at this same time last week.

Borrowing costs: Mortgage rates are much higher in Bermuda than the US