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Lower base lending rate won’t always mean cheaper loans, experts warn

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The Government’s plan to tie the base lending rate charged by Bermuda’s banks to the US prime rate will not necessarily mean cheaper loans for borrowers, financial experts warned yesterday.

Nathan Kowalski, a financial columnist for The Royal Gazette, said: “The first reaction is for people to look at mortgage rates in the US, but the risk of lending in the US and Bermuda is quite different.

“The US has a huge and more diversified economy and has a myriad of government programmes that help to lower mortgage risk.

“So, to compare the US and Bermuda mortgage markets can be misleading.”

Mr Kowalski added: “The transparency offered by using the US base rate here is nice to see, but I am not sure it translates into the same mortgage market as the US.

“Requiring banks here to consider the same base rate creates a market base to look at but it does not necessarily guarantee lower lending rates because a series of underwriting considerations need to be taken into account, including creditworthiness, the amount of the down payment, and the general risk of Bermuda itself.

“Every bank will have its own lending criteria and will assess loans or mortgages based on that. The cost of money that banks put out there reflects a whole myriad of considerations, not just the base rate.”

Mr Kowalski was speaking after Curtis Dickinson, the Minister of Finance, said that legislation would be introduced to require Bermuda banks to use the US prime rate, at present 3.25 per cent, as their base rate.

Mr Dickinson said banks would be able to charge customers a premium on top of that rate based on “credit quality”.

He added the move will “bring clarity and greater transparency to the setting of lending rates”.

Craig Simmons, a senior economics lecturer at Bermuda College, said: “At issue is the spread between what savers earn on deposits and what borrowers must pay for loans and mortgages.

“Deposit rates between Bermuda and the US are about the same. But local borrowers face rates in excess of seven per cent. That’s about a 400 basis point spread – four per cent.”

He asked: “What’s the cause of the disparity? It’s difficult to see how more ‘transparency or clarity around how our local banks set rates or even their base rate’ will address the issue.”

Mr Dickinson earlier this week explained why the Government had taken action.

He said: “Interest rate benchmarks are a useful basis for all kinds of financial contracts such as mortgages, bank overdrafts, and other more complex financial transactions.

“In fact, most developed countries have some form of a base rate that is used by financial institutions in that country to price their own loans.”

Mr Dickinson added: “One of the challenges I have found, as the Minister of Finance, is that there is very little transparency or clarity around how our local banks set rate or even their base rate as each bank seems to have its own rate, with some having different commercial and retail base rates.

“Bermuda banks will be required to set rates on loan products, such as mortgages and auto loans, based on the US prime rate and customers will be able to easily compare rates from various banks before making a borrowing decision.”

The finance minister said that the legislation, if passed, would apply to new products bought and sold.

A spokesman for Butterfield Bank said: “Until such time as the particulars of the proposed legislation are available for review, Butterfield is not in a position to comment.”

An HSBC Bermuda spokeswoman said: “We have noted the Minister’s statement and will follow further developments.”

Nathan Kowalski
Craig Simmons (File photograph)

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Published November 13, 2020 at 9:18 am (Updated November 13, 2020 at 9:17 am)

Lower base lending rate won’t always mean cheaper loans, experts warn

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