Tuesday, September 02, 2014
An approach to home loansMonday, August 06, 2012
While the government speaks of affordable homes, the effort being made is somewhat invisible to the average citizen. The truth is that most Jamaicans will never own a house if the current practices are allowed to prevail.
The National Housing Trust is good but unlike other countries in the region, it will lend only a portion of the funds required to build a house even if you can't afford the entire amount. Yet the NHT will lend the government money.
With some one million Jamaican squatters, the approach needs to be more proactive. The wasted opportunity of the Jamaica Debt Exchange did allow a reduction in interest rates, but notwithstanding that the reduction in interest rates did not significantly impact the spread of lenders. So there is opportunity for further reduction in rates.
I have a suggestion: the interest rate a customer pays to a lender is made up of several factors. The most obvious of these is the cost that the lender must pay to whomever he or she borrowed the funds from in the first place; and next the cost to operate from day to day. However, another significant part of this is the portion that the lender must put aside to pay back everyday savers and continue operating in the event the loan goes bad.
The risk that the loan will go bad could be covered by the government. The circumstances under which the government would provide coverage would be outlined so not all borrowers would qualify, while simultaneously allowing more borrowers access to funds. This would allow lenders to reduce their interest rates by that cost as it would be borne by the government. Of course, the lenders would have to pay some minimum fee for the government to guarantee this portion of the loan. In addition, it would be prudent to allow everyday investors (financial institutions and individuals) to jump in also and buy a piece of the pie. This strategy would allow the government to bite off bigger chunks of the cost and further reduce rates. To put this into perspective, consider that the loan payment on a mortgage of $10 million is $87,000 per month at 10 per cent, compared to $80,000 per month at 9 per cent, so even shaving off one per cent in interest rate is significant.
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