Understanding T&T’s mortgage market

Empowered by Section 10(d) of the Financial Institutions Act, 2008, the Central Bank can issue guidelines on any matter it considers necessary to regulate the market conduct of licensed financial institutions. That said, the Central Bank, having consulted with the Bankers Association of T&T (BATT), issued  Residential Real Estate Mortgage Market Guideline. The Central Bank and BATT have agreed that the MMRR will be reviewed at least once every three years. The guideline specifies a minimum set of information that licensees must provide to mortgagors on the terms and conditions of their mortgage contracts.

Greater disclosure by licensees will help mortgagors make more informed decisions and facilitate better financial planning. Increased transparency will also improve the operations of the mortgage market by increasing competition among lenders. In December 2011, the Central Bank set the mortgage benchmark at 3.5 per cent. Over any three-year period, the residential mortgage rate could increase by a maximum of 350 basis points or by the increase in the Central Bank’s repo rate, whichever is larger.

Below are some frequently asked questions, prepred by the Central Bank.

Scope of the guideline
The guideline introduces the new reference rate—the residential Mortgage Market Reference Rate (MMRR)—which will be computed quarterly by the Central Bank based on information supplied by the licensees. The actual mortgage rate charged to consumers will be the most recent MMRR, plus a margin determined by the licensees. The margin to be set by the licensees will reflect, inter alia, the borrower’s credit rating, the amount of the down payment and the location of the property. The MMRR will be used to determine the initial mortgage rate on all residential mortgages and for re-pricing variable- and adjustable-rate mortgages. At the time of signing of the mortgage contract, licensees will also be required to provide a disclosure statement to their customers.

Disclosure statement
The disclosure statement should be written in plain language and must contain, at a minimum, the following information:
i.  the type of residential mortgage contract granted (fixed, adjustable or variable).

ii  the principal amount of the residential mortgage.

iii the term of the residential mortgage.

iv the MMRR used to price or re-price the residential mortgage and the margin.

v  the mortgage rate that is applicable at the time of signing of the mortgage contract and the period for which this rate applies (eg, one year, three years).

vi terms and conditions governing pre-payments and accelerated payments, including fees and charges.

vii the monthly instalment and the date the instalment is due. In the case of a fixed-rate mortgage, the instalment is fixed for the life of the mortgage. In the case of variable- and adjustable-rate mortgages, the instalment remains unchanged until the next re-pricing date.

viii. an amortisation schedule showing how instalments would be split between principal and interest repayments over a 12-month period until the mortgage is re-priced.

The guideline does not apply to:
i mortgages granted under any special housing arrangement with the Government

ii mortgages (or the portion of the mortgage) granted to employees of licensees at preferential rates

iii mortgages granted by the Home Mortgage Bank

iv commercial mortgages

Mortgage terms:
The definitions of key terms seek to bring about clarity as well as a degree of standardisation to the terms used in mortgage contracts issued by licensed financial institutions in the local market.

i A real estate mortgage is defined as a written agreement that creates a claim or lien upon real estate as security for the payment of a specified debt.

ii A residential mortgage is a written agreement that creates a claim or lien upon real estate for residential use as security for the payment of a specified debt.

iii A fixed-rate mortgage is a mortgage in which the rate of interest charged remains unchanged throughout the entire term of the loan.

iv A variable-rate mortgage is a mortgage in which the rate of interest charged is subject to change during the term of the loan.

v An adjustable-rate mortgage is a mortgage in which the rate of interest charged is fixed for a specified period but is subject to change thereafter.

vi A mortgage market reference rate is an interest rate benchmark against which mortgages are priced or re-priced.

vii A margin is defined as the difference (in basis or percentage points) between the mortgage market reference rate and the interest rate applicable to the mortgage.