Home' Trinidad and Tobago Guardian : April 6th 2017 Contents BG18 | FINANCIAL ROAD MAP
BUSINESS GUARDIAN guardian.co.tt APRIL 6 • 2017
The right bank for you
Devon, 30, is very upset with
his existing bank. After tak-
ing out a mortgage a few years
ago the monthly payments
have steadily increased and is
now $1,500 more than what it
was when he first started. The bank attributed
the hike to changes in the MMRR (mortgage
market reference rate) and, to a lesser extent,
their margin applied when he got the loan.
The mortgage has 25 years remaining with a
present balance of $1,800,000; the annual
interest rate and monthly payments are 6%
and $11,597 respectively.
Because his contract rate is variable, the
bank was unable to give any assurances that
rates would not change in the near future but
promised to give him three months notice if it
does. When he requested a settlement figure,
he noticed that there was a penalty of $54,000;
the equivalent of six months interest.
Uneasy about the future rate changes, Devon
started shopping around the mortgage market
and now has three offers from different lenders
(which we will call Blue, Red and Orange). The
switch will incur costs including:
• Property valuation: $5,400,
• Stamp duties: $7,200 and
• Legal costs: $12,600.
The lenders differ with respect to their loan
• Blue: $9,000 (0.5% of Loan),
• Red: NIL (0% of Loan) and
• Orange: $18,000 (1% of Loan).
The most interesting offer was from Blue,
which has agreed to waive all closing costs and
charges as long as Devon keeps his mortgage
in force for at least five years.
As regards to their respective interest rates:
the MMRR that they all used was 3% per annum
plus varying margins: Blue: 1.5% Variable, Red:
2.5% Variable and Orange: 4% Fixed with little
or no increases in response to MMRR.
Each lender also carries different penalties
for early repayment: Blue is four months in-
terest, Red is six months interest and Orange
has no penalties either for early repayment or
lump sum payments of any amount.
The other two have limits to eligible annual
lump sums without penalties: Blue is 20% of
original loan and Red is 10% of original loan.
Completely paralysed by all the data, Devon
does not know which is the best option. He
likes the fact that Blue is offering the lowest
rate and will waive all charges but he has some
trepidation that history could repeat itself.
Before we dive into our discussion about this
very common issue some explanation is needed
regarding MMRR and margin rates.
According to a Central Bank website (http://
gage-market-reference-rate-mmrr) we quote
the following excerpts:
"The Residential Real Estate Mortgage Mar-
ket Guideline came into effect in September
"The Mortgage Market Reference Rate
(MMRR) is an interest rate benchmark against
which mortgages are to be priced and re-
"Your mortgage rate will be based on the
MMRR plus the margin charged by your bank."
"The margin takes into account the custom-
er's credit rating, the location of the property,
the size of the down payment and the size and
quality of collateral."
"The MMRR is calculated as a weighted com-
bination of applicable Treasury yields (60 per
cent weight) and commercial banks' cost of
funds (40 per cent weight). The Central Bank
calculates the MMRR based on this formula
using information it collects from commercial
banks and on Treasury yields (15-year Central
Government bond yield) and announces the
rate to the public on a quarterly basis..."
"The guideline requires that all mortgage
rates be linked to the MMRR. Licensees are
expected to adjust mortgage rates downwards
if the MMRR is declining, but have the option
not to adjust mortgage rates upwards if the
MMRR is rising. The type of mortgage contract
that you hold will also govern movements in
your mortgage rate." "Variable-rate residential
mortgages may be re-priced by licensees no
more than once every 12 months on the anni-
versary date of the mortgages."
"There are two main mechanisms to protect
customers against rapidly rising interest rates.
Firstly, licensees have the option not to increase
mortgage rates even if the MMRR is rising.
Secondly, the guideline states that over any
three-year period, your 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."
"The guideline is not applicable to:
(i) mortgages granted under any special
housing arrangement with the Government
of the Republic of T&T (eg with TTMF);
(ii) mortgages (or the portion of the mort-
gage) granted to employees of licensees at
(iii) mortgages granted by the Home Mort-
gage Bank; and (iv) commercial mortgages."
The art of selling
The mortgage business is a source of stable;
relatively large income for lenders and with
the collateral backing of an insured property
often valued more than the debt itself, the risk
is very acceptable.
With such as desirable asset (a debt to the
client but an asset to the lender) it is no wonder
why the competition amongst lenders is so in-
tense. What we have seen is that no two lenders
will ever compete on the same point; each one
showcases its strengths especially those that
are diametrically opposed the weaknesses of
a close competitor.
This differentiation makes it very difficult
for the uninitiated (customer) to discern which
overall option is better. In our case we see this
played out in the use of “Loan Administration
Fees" which offer some leeway for negotiation.
The truth is that all waived charges offered
today will inevitably be recouped from inter-
est payments in the first few months of the
Fixed and variable rates
Regardless of an individual's financial savvy
it is quite difficult to predict future interest
rates, which is why an element of variability
is built into most rates.
For mortgages that carry "Fixed Rates" the
rate is often high enough to compensate for
any adverse long-term changes. Whilst none
of the lenders in our case have such fixed rates
there is one (Orange bank) that comes close by
offering a fixed but high margin of 4% on top
of the 3% MMRR.
The benefit of this to the customer is a fair
degree of predictability with future cash flows,
but this predictability comes at a cost in terms
of a higher margin and absolutely no conces-
sions with closing charges.
On the other hand the other two lenders
(Red Bank and Blue Bank respectively) have
differing degrees of margin variability, where
the more stable margin (Red Bank: 2.5%) is
1% higher than that of the more variable Blue
Bank (1.5%). Though these percentages appear
small, depending on the size of the mortgage
they could translate into thousands of dollars
($1.8MM x 1% = $18,000 in year-one).
Choosing the best option
Quite naturally Devon's first response is
a preference towards Blue Bank's offer with
the lowest annualised rate (4.5%) and smallest
monthly payments $10,005.
Blue bank has further sweetened the deal
by waiving the total closing costs of $34,200
on the condition that Devon keeps the facility
on the books for at least five years.
Notwithstanding these positives Devon
cannot escape the early repayment penalty of
$54,000 from his existing creditor ($1.8MM x
6% = $108,000 /12 = $9,000 x 6 months). With
such a hefty sum it would be in Blue Bank's
interest (pun intended) to further sweeten the
pot by offering to tack that figure on to the
Now despite all of this good stuff from Blue
Bank nothing is stopping them from graduating
their rates in the coming months and years,
which could push instalments back to the pres-
ent level and force him to go on another rate
hunt. If this does happen and Devon decides
to move again he would have to shell out four
months interest on the principal, and with
mortgages being what they are it is doubtful
that principal would reduce significantly in
the first five years.
The truth is that even with the best up front
deals with a switch, once the client is moving
from a variable rate contract to another variable
rate contract these benefits would more than
likely be offset by the long-term interest costs.
The trick is really to get rid of the debt sooner
rather than later, penalty or not.
So, is the Blue Bank the best option?
Well the reduction in mortgage payments
will free up $1,592 (Existing: $11,597 - $10,005:
Blue) from Devon’s cash flow. If he chose Red
Bank's offer the monthly savings would be $543
(Existing: $11,597 - $11,054: Red). "Assum-
ing" that rates do not increase for some time
again Blue Bank's savings of $1,592 could offset
the $54,000 set back in 34 months ($54,000
With Red Bank that timeframe would be
much longer as they have not waived the clos-
ing costs and the monthly surplus is smaller
($54,000 + $25,200 closing costs = $79,200 /
$543 = 146 months or 12 years). In both cas-
es, however, if rates increase the respective
cost-recovery periods would lengthen with
the converse if rates fall.
If Devon does go with the Blue Bank’s offer,
it would be instructive to keep a tally of how
much cumulative savings he achieves over
the first five-years and beyond then match
this against the existing exit penalty plus the
waived closing costs plus any possible interest
penalties for future early repayment.
Devon could set aside these and periodically
apply them to his principal in accordance with
the annual penalty free limits.
Nicholas Dean (CertFa) is a certified
independent financial adviser and is the
managing director of The Financial Coaching
Centre Ltd. If you have any questions or
need advice on today's subject please email:
email@example.com or visit website: www.
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