The fleecing of Bermuda
Buying a piece of the rock in Bermuda, like most things, ends up costing more when compared with buying property in other countries, such as the United States and Britain. Not just because of the high cost of real estate, but with the high mortgage rates that are charged to purchase it, creating a double whammy effect.
Every now and then, there are complaints made publicly to point out the high interest rates, and the banks counter by making a statement to justify their costs. The political parties proclaim they will address the issue, but no solution has been implemented to help make the purchase of a home less expensive.
Purchasing a house in Bermuda is one of the main contributing factors for our high cost of living. This is not on everyone’s radar because they are oblivious to the actual numbers in a mortgage and what is offered elsewhere.
Dissecting a $500,000 30-year mortgage, at a standard (Bermuda) interest rate of 6.5 per cent, here is our reality:
1, The monthly payment for a Bermuda mortgage at the above scenario is $3,160 per month for the length of the term, in contrast to $2,051 per month for a mortgage in the United States at an available interest rate of 2.79 per cent. The exact same mortgage amount and length of term in the US is $1,109 per month less
2, The total payable amount at the end of the term for a Bermuda mortgage is $1,137,722, which is 128 per cent above the $500,000 mortgaged amount. The total payable amount for a mortgage in the US is $738,360, which is 48 per cent above the same mortgaged amount
3, Bermuda residents are paying back more money in interest rates ($637,722) for a 30-year term than the mortgage itself. Another way to state this: the banks in Bermuda are making more money in interest than the actual loan
4, Using the notion that real estate appreciates over the long term at the rate of inflation, which averages at about 2.5 per cent annually, the value of the $500,000 mortgaged amount in Bermuda does not break even with the total payable amount (loan plus interest) until Year 35, which is five years after the mortgage term. In the US, the breakeven is in Year 17 after the beginning of the loan. In Britain, with an available interest rate of 3.4 per cent, the breakeven is in Year 20.
The banks have claimed their mortgage interest rates are justified in Bermuda, primarily because of the additional risk of lending and the high cost of doing business on the island. Their reasoning for an increase, at least, is true as it is unrealistic to believe our mortgage interest rates could be available in the range of 2.5 per cent to 3.5 per cent like other big countries. Bermuda does not have the various tools and programmes of lowering the risks as they do, and we all are aware of Bermuda’s high cost of doing business.
However, in the Cayman Islands, which is a similar market to Bermuda, the banks appear to be more flexible with their lending programmes. Mortgage interest rates are available as low as 4.5 per cent to those that qualify. Compared with our interest rate, using the above mortgage scenario, this would result in a total savings of $225,842 over the length of the term. The breakeven is in Year 26.
One could argue the economy in Cayman has been expanding faster in recent years compared with Bermuda, and they are not burdened with the amount of debt as we are. Thereby, the risk in Cayman would be less. However, our mortgage rates were still relatively high when Bermuda’s economy experienced its steady growth from the 1970s to mid-1990s, and then high growth from there until the global recession in 2008.
Cayman is also fortunate in having twice the number of banks that we have. As we all know, competition often leads to lower prices as consumers would have more leverage. Whether this has led to their banks offering lower rates, I can only speculate.
Another difference in both markets is that mortgage rates in Cayman move with the US prime rate and, in Bermuda, the banks set their base rates based on various factors. To bring clarity and greater transparency to lending rates, the Bermuda Government is looking to reform the banking laws to require the banks to use the US prime rate as the base rate, like Cayman. Whether this will lead to lower rates, I would defer that to local economists and those who are more familiar to answer.
I acknowledge lending money in a small market such as Bermuda carries more risk. It is also no hidden secret about our high cost of living. However, it appears to me the banks in Bermuda are not doing us any favours, and it feels like we are getting fleeced. There are limited borrowing options to buy real estate on the island; Bermudians have no choice but to shop locally.
Whatever happened to being creative and coming up with win-win solutions? For example, if risk is such a big concern, why not create a mortgage cashback product? At the end of the mortgage term, the lender would receive cash back, as they are no longer in the risk pool. Perhaps if there was more competition, these types of innovative ideas would be offered.
For our young people who want to purchase their home, I have simple advice. Save as much as you can and start early. The more you have as a down payment, the less of a mortgage you will need. If you can, take out a 20-year mortgage instead of a 30-year. The mortgage interest rate for a 20-year term should be less and your total payable amount, using the above scenario, would result in a $243,242 savings over the term.
A house is a family’s foundation. It is a permanent place where memories are built and shared among loved ones. Real estate is also a great way to build generational wealth. However, the easy money is off the table, and it has become more difficult for some to sustain their mortgage, and for prospective buyers to begin their journey as homeowners. It is overdue for the stakeholders to come up with ways to reduce the financing costs for a piece of the rock.
• Malcolm Raynor has worked in the telecommunications industry in Bermuda for more than 30 years. Benefiting from Cable & Wireless’ internal training and education programmes held in Bermuda, Barbados, St Lucia (The University of the West Indies), and the UK, he rose to the level as senior vice-president. An independent thinker possessing a moderate ideology, his opinions are influenced by principle, data and trends