Consumers are set to pay more out of pocket to service their existing loans as different financial institutions adjust their interest rates on existing variable rate loans and on the headline rates for current offerings.

The Victoria Mutual Building Society (VMBS) and JMMB Bank (Jamaica) Limited are increasing the interest rates charged on existing variable rate loans by up to 1.75 and 1.25 per cent, respectively, on May 1. This would be the second round of interest rate hikes by both institutions which made increases of up to 1.50 per cent last July and August, respectively. Both institutions referenced the Bank of Jamaica’s (BOJ) policy rate increase and conditions impacting the local financial sector.

“Everything is connected and that’s the truth, but we’ve had to adjust the lending rates as the cost of funding has increased. We’ve had to be paying more to raise deposits in the market. As you’ve heard, our loan portfolio has grown significantly over the past few years, and we’ve been growing faster than the market. Our deposits have grown as well. The deposit base has grown faster than market as well, but we are paying some pretty high interest rates to raise funds,” said president and chief executive officer (CEO) of the VM Group Courtney Campbell at a Jamaica Observer Business Forum last Wednesday.

Deputy CEO of the VM Group Peter Reid also opined, “All our loans are variable rate. On the deposit side, we have varying products. A normal savings account sees the rates adjusted according to the market. We’ve always been aware of the benefits of savings to our members and therefore, adjustments in rates are really designed to keep pace with what is happening.”

VMBS’ net interest income in 2021 was flat at $4.99 billion on a loan book of $92.41 billion. This was due to the interest expense rising 22 per cent to $2.09 billion relative to the $7.08 billion earned in interest income. Eighty-six per cent of that loan book was conventional mortgage loans while the rest were spread across different categories.

Sagicor Bank Jamaica Limited, National Commercial Bank Jamaica Limited and First Global Bank Limited implemented their second-round interest rate hikes on variable rate loans in early February. This has also been accompanied by an increase in the rates offered on products such as car loans, mortgages and unsecured loans by as much as 300 basis points by different deposit-taking institutions (DTIs). An example is the Bank of Nova Scotia Jamaica Limited (BNSJ) increasing its headline rate on mortgages from 6.99 per cent to 8.49 per cent recently.

However, BNSJ, FirstCaribbean International Bank (Jamaica) Limited (FCIBJ), JN Bank Limited and Citibank NA have yet to institute a second-round of hikes on existing variable rate loans. JN Bank and VMBS are increasing fees offered on other services come next month though.

Although the BOJ has paused its rate hikes since December, the 7.0 per cent policy rate and increased overnight lending rates has pushed financial institutions to increase lending rates to account for the increased cost of funding. This also comes at a time when DTIs are suffering fair value losses from assets such as stocks and bonds along with the implementation of Basel III in July which will require more capital to be held on book.

The BOJ’s monetary policy meeting is set for May 19 which will take place amidst a decline in point-to-point inflation which was 6.2 per cent up to March.

These rate hikes aren’t isolated to solely DTIs such as VMBS, but also affect other financial institutions which lend capital to borrowers. Victoria Mutual Investments Limited (VMIL) increased its interest rates on its margin loan product on April 1 with one e-mail to a client noting 15.50 per cent per annum. This is the second hike since September 1 where the rates were adjusted to the range of 11 to 13 per cent based on a one-to-five-year tenure for the margin loan. A prior margin loan rate was 10.00 per cent for five years.

When asked about the increase in rates, VMIL CEO Rezworth Burchenson said, “We did a bond with double digit interest rates which is funding our loan portfolio, example being our margin loan portfolio. Because of the increasing rates, we have to maintain a profitable margin. All loans are variable rates, and we believe that when we get back to that state of a more accommodative monetary policy, we’ll adjust our rates down.”

The bond being referenced here was a $5.8-billion bond that was listed on an indicative term sheet as open from November 7 with an original closing date of December 29. However, the bond closed at the end of the first quarter instead.

The bond had four tranches varying from three to five years with two tranches having fixed rates of 10.50 and 11.75 per cent per annum and the other two tranches being variable rate plus a fixed margin.

Rising interest rates have increased the cost of funding across the spectrum from borrowing rates by financial institutions to entities issuing bonds. NCB Financial Group Limited (NCBFG) issued a bond in September 2021 at 6.00 per cent, but just issued a bond with two tranches at 10.75 and 11.75 per cent last month.

Even Mayberry Investments Limited raised $6.4 billion in their public bond offering at rates ranging from 9.25 per cent to 12 per cent to fund their margin loan facility which was growing at double digit rates. Mayberry increased its margin loan rate by 300 basis points (3.00 per cent) to 15 per cent on July 1.

While interest rates are increasing on loans, more DTIs and other licensed institutions are increasing the interest rates offered on deposits. FCIBJ increased its interest rates on four of its saving account products on March 1. Even NCB Capital Markets Limited is offering 8.0 per cent on JMD repurchase agreements (repo) and 4.0 per cent on USD repo for April. Barita Investments Limited’s JMD repo rate ranges from 3.00 per cent at seven days to 7.50 per cent for 365 days with USD repo’s ranging from 3.40 per cent to 4.30 per cent. JMMB Investments is also offering JMD products at 90 days with a 8.50 per cent interest rate and 9.50 per cent for 365 days.

These increased rates for customer’s money on a fixed income instrument is meant to shore up liquidity for the different financial institutions and ensure they can compete in the higher interest rate environment.