Mortgage rates will move upwards for both new and existing homeowners as building societies react to drastic rate increases administered by the Bank of Jamaica (BOJ) on its securities in recent months.

The move may see some mortgage holders who currently enjoy payments on loans carrying interest below 13 per cent, see their rates jump well above 20 per cent.

What's more is that rates may change in a week.

In an effort to stabalise the foreign exchange market, which has been significantly pressured due to a confluence of economic factors, the central bank has increased interest rates payable on BOJ Certificates of Deposits considerably. The most recent hike occurred on Monday, when interest rates applicable on 365-days open market tenors increased to 24 per cent. Since the start of the year, 30-days and six-month Certificate of Deposit Rates have risen by 535 and 950 basis points respectively.

Six-month treasury-bills yield auctioned by the BOJ on November 26 was 19.26 per cent, an increase of 592 basis points since the start of the year.

Currently, mortgage rates range from around 12 to 18 per cent.

Victoria Mutual Building Society (VMBS) CEO Richard Powell told the Business Observer that by increasing the institutions' interest expense, the central bank's actions have effectively squeezed margins and cornered them into making mortgage rate adjustments.

"Regrettably, on this occasion, because the interest rate movements have been so significant, we have no choice but to put up rates to our borrowers," said Powell. "All financial intermediaries will have the same problem: Banks, building societies, etc.

"Whenever you are relying on savings to fund loans, if you have to pay more on the savings then you have to charge more on the loans," continued Powell. "With the latest hike in rates by the BOJ, savers therefore are going to be demanding higher rates, so rates are going to go up, both in terms of our deposits and on the loan side."

According to Powell, the imminent rate increases at VMBS may be executed in two stages. Rate increases on new loans, he said, may take effect as soon as within the next week; existing borrowers, however, need to be notified at least three months in advance.

Jamaica National Building Society general manager Earl Jarrett and head of First Caribbean Building Society, Robert Wright, expressed similar sentiments to Powell's.

"When the cost of your funds are going up, then one has to look at the cost of the rate that you offer to the public, so we will have to take a review of those rates, and on the current business of things, we will be seeing upward pressure," noted Jarrett.

Said Wright: "There is a strong likelihood (that rates will be increased)... There is consideration being given to it based on the fact that the securities that are available and the cost of deposits on the market have risen substantially in recent weeks."

This development has sparked concerns in the local housing market, which has already been adversely impacted by the fallout of the alternative investment schemes and other economical strains being felt by Jamaican homeowners and home-seekers.

According to Bank of Jamaica data released in August, up to June 2008, $2.1 billion in non-performing mortgage loans - loans in arrears for three months and over - were in the system, up 71 per cent over the year prior.

VMBS' Powell also expressed delinquency concerns, which he said was a major factor why building societies will increase rates "reluctantly".

"We are just responding to the market, we have no control over it," said Powell. "We don't want to put pressure on householders; delinquencies do no good for us
"Our business is to facilitate homeownership," he stressed.

The Private Sector Organisation of Jamaica, headed by Christopher Zacca, in a release yesterday said that it "...views with concern, the recent move by the BOJ to sharply increase rates on its Certificates of Deposit. This will inevitably raise interest rates across the financial system, putting more pressure on an already weak real economy at a time when the global economic crisis is placing severe pressure on Jamaica."

Don Glanville, president of Realtors International, believes that the increases will have the most impact on the higher end of the market, where properties are valued above $35 million. The veteran realtor disclosed to Business Observer that the industry had already been noticing that the turnover rate for the sale of properties has slowed to four to seven months from two to five months.

"Certainly the market has already slowed at the top end," said Glanville. "In terms of homeowners, it puts pressure on his/her ability to qualify which will affect consumption. The increases in mortgage rates is bound to cause (further) setback."

Anya Levy of Valerie Levy and Associates Limited believes an increase in mortgage rates will definitely impact the housing market adversely.

"Mortgage rates are vital to our industry, it is the barometer of the real estate market," she said.

Glanville said that the challenge is exacerbated because there is an undersupply of lower-end properties - properties valuing $10 million and under.

"On balance, Jamaica has always had an under supply on $10 million and below properties," he said. "The limited products will make it even harder."

Both Glanville and Levy, due to the lack of securitisation on local mortgages, do not forsee the local housing challenges now being faced developing in a similar manner to that of the sub-prime crisis in the US. In the US, as mortgage delinquencies soared, securities backed with sub-prime mortgages, widely held by financial firms, lost most of their value and triggered an economic crisis.

"We will never get to the extent of the sub-prime crisis because we don't have the inventory in Jamaica," said Levy.

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