2023-07-18 07:03:01
Home loans are getting more expensive. The Panamanian banking regulatory body announced an increase of 0.08% in the reference rate for mortgage loans as of August 1, 2023
And the forecasts came true: the upward trend in loan interest rates landed in Panama. Today, many bank customers woke up with an email announcing that the reference rate for mortgage loans (homes) will increase 0.08% from August 1, 2023.
On June 29, 2023, the Panamanian banking regulatory body, the Superintendence of Banks of Panama (SBP), communicated it. A circular issued to the banks expressly states that “in accordance with article 4 of Law No. 3 of May 20, 1985, modified by Law No. 94 of September 20, 2019, which establishes a preferential interest on certain mortgage loans, we would like to inform you that the calculation of the reference rate for the third quarter of 2023 was 5.92%”.
“In accordance with the foregoing, the local market reference rate for residential mortgage loans, corresponding to the third quarter of 2023, is 6.00%…”. With this change, the loan rate increased 25 percentage points effective August 1, 2023, a bank told a customer.
Internationally, interest rates are increasing and this is having an impact in Panama. With the arrival of the covid-19 pandemic, the economy was practically paralyzed. To keep it working partially, the governments of the different countries injected money so that their citizens will continue making purchases. With this they sought to stimulate the economy. But when the health crisis ended, an imbalance was generated. There was much more money in circulation than usual, and this put pressure on demand, increased prices, and led to exorbitant inflation.
The United States, for example, surpassed 9% inflation in 2022. In the past four decades, the US economy had not experienced that level of price inflation. And when inflation rises, so do interest rates.
The US government began withdrawing money from the economy seeking to lower prices. And when liquidity is withdrawn, interest rates become more expensive, explained economist Ernesto Bazán.
During 2022, the US Federal Reserve made steady increases in interest rates. In one year –2022– they increased 500 basis points. In Panama, only mortgages have increased, by 0.08%. A percentage – which according to the economist’s criteria – does not seem significant in comparison with what happened in the United States. That’s the good news. The bad news is that this could just be the beginning. What is worrying is that the upward trend in rates will continue and hit the country again.
The increase in interest rates came to the country with a lot of delay, considering that it happened a little over a year ago in the United States. This probably occurred because a part of the fundraising of the Panamanian banks is done through time deposits. And the rate update period occurs with the maturity of the deposits. And second, is that historically the impact of the increase in interest rates in Panama has been less than in other countries, Bazán concluded.
The economist Raúl Moreira criticizes the increase in interest rates as a consequence of what happened in the United States. This considering that in Panama credits are financed with deposits from internal customers.
Moreira explained that with this increase the only one affected is the client, who will face a higher interest rate on their mortgage loan. When mortgage interest rates rise, banks charge more for the loans. If clients choose to keep the same letter, the time that they will have to pay off the loan will be longer. Although, they can also apply the increase in the time of the loan.
Economist Felipe Argote claimed that when interest rates drop in the United States, they do not in Panama. But if the opposite occurs, the increase is applied. “It can’t be that the system works on only one side,” Argote complained.
He explained that in the United States there is a lot of money in circulation because unemployment is low and the cost of labor rose considerably. That is why he believes that interest rates will continue to rise to cool the US economy. On the contrary, in Panama there is not much money in circulation because unemployment is high, reaching 10%. However, with the increase in interest rates, US inflation was imported.
Argote believes that the only ones benefiting from the increase in mortgage interest rates are banks and developers. The promoters, according to Argote, because they are requesting the extension of the preferential interest – which establishes a discount on the interest rate of the loans to build and sell new homes – to lower the inventory. “The State gives them preferential interest so they can sell homes instead of lowering prices,” he concluded.
The mortgage loan portfolio for the purchase of the first home has experienced significant growth. Loans granted for the purchase of the first home went from $1,467.5 million in 2005 to $8,358 million in 2023. Although the total mortgage portfolio represents $17,500 million.
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