The Tribune

• Aims to make it ‘very costly’ to remortgage

• Bank chief: Too many using it for ‘bridging’

• Needs to find ‘creme de la creme’ clients

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bank of The Bahamas is imposing “heavy early repayment penalties” on construction mortgages in a bid to dissuade borrowers from treating such loans as a “bridging” facility to its detriment.

Kenrick Brathwaite, the BISX-listed institution’s managing director, told Tribune Business that the policy had been imposed “a couple of months ago” to make it very costly for those borrowers to remortgage with a rival bank as soon as the subject property was completed.

He argued that such a move was unfair to the original lender, which takes on the higher risk associated with financing construction new-builds only to have its facility paid-out early, while the borrower typically benefits from a lower interest rate and greater following the remortgage. The bank that takes over the loan also gains from the lower risk associated with a completed property that has now increased in value.

“We’ve put some things in place to try and stop the erosion of the portfolio, and to try and get some growth in the next financial year,” Mr Brathwaite told this newspaper, after Bank of The Bahamas’ gross residential mortgage book shrank by 7 percent or over $14m in the year to end-June 2022. “They’re the easier ones to try and address.”

The portfolio declined from $201.974m at end-June 2021 to $187.679m some 12 months later. The post-COVID surge in building material and construction costs has seen many commercial banks moving away from issuing fixed-price mortgages for new builds, in particular, since it is impossible to accurately determine the sum required.

Mr Brathwaite added that this reluctance has been worsened by the increasing tendency of construction mortgage borrowers to instantly seek to refinance such loans with a rival financial institution immediately upon completion in a bid to obtain more favourable terms and lower debt servicing costs.

Some may view the imposition of penalties to deter such behaviour as anti-consumer and a restraint of trade/competition, but commercial banks view construction mortgages as long-term loan assets that need to be matched with deposit liabilities to ensure they generate returns and remain solvent. Borrowers treating these loans as short-term bridging facilities does not fit into this requirement.

“I think the mortgage market has its own challenges. Some banks are not even doing any kind of construction mortgage. If you want a construction mortgage, you’ll find many banks are putting heavy early repayment clauses in there,” Mr Brathwaite told Tribune Business.

“Some people are going to a bank and saying another one said no to a construction mortgage. They come to Bank of The Bahamas, as an example, get a construction mortgage and, when the building is largely finished, go to the earlier bank to pay that out.

“To control that we have to put heavy early repayment penalties in there so that if they try to move it, it will be very costly for them in addition to the legal fees. The construction phase of the mortgage is a high risk phase. You have the possibility of escalating charges, you have the possibility of escalating costs common to imports, you have challenges with labour shortages, and you have challenges with inclement weather,” he added.

“That’s why construction mortgages are extremely high risk, and therefore attract a higher rate. But, if you can pay out the mortgage, you can reduce that rate by 50 basis points and still be OK.” Mr Brathwaite said that, besides reducing their risk, borrowers who refinanced construction mortgages early also obtain a greater “equity position” in a finished property that now has “a better value” than when work began.

“We’ve started that a couple of months ago,” the Bank of The Bahamas chief said of the penalties for early refinancing. “Some people have been forthcoming with information, saying that was always the intent and then wanting us to waive the penalty clause. We’re saying that we won’t waive the penalty clause; that’s what’s safeguarding our mortgage for the future.”

Mr Brathwaite, meanwhile, said that Central Bank permission to re-start commercial lending - a segment it has been barred from since 2014 after it almost caused the bank’s collapse - was critical to deploying its $179.226m in cash and Central Bank deposits for more productive, higher returns.

That figure is equivalent to more than 18 percent of Bank of The Bahamas’ total assets at end-June 2022, with some $165.309m - or 92.2 percent - of this sum held in non-interest bearing accounts at the Central Bank. That amount does not include $27.23m statutory reserve held by the regulator.

“You’ve hit the nail on the head. That’s exactly one of the reasons why we want to start commercial lending because that will absorb some of the liquidity in the system,” Mr Brathwaite said. “Not all commercial banks in The Bahamas want to do commercial lending, especially to small businesses. That’s definitely a space we can operate in and use up some of that excess liquidity.”

Pointing out that Bank of The Bahamas and other Bahamian commercial banks had “taken the lick last year” when it came to providing for COVID-related loan losses and deferrals, he added that all were now reporting higher or significant profitability.

Mr Brathwaite, saying he was “keeping my fingers crossed that it will be better” with profits for the 2023 financial year exceeding last year’s $11.218m, said: “We’re on track. Once we put structures in place and create revenue streams that will are consistent, I think we’re going to be fine for this year.

“We’re really going to be focused on our mortgage portfolio. We’re going to have some campaigns for sure. We’ve reduced interest rates more in line with the market. We’re going to try and operate more efficiently in the mortgage space. We don’t have that kind of great appetite for all mortgages. Mind you, if you look at delinquent mortgages and those homes being repossessed, at least you know what the market is like.

“It’s not quite so easy to find those exceptional low risk borrowers, but we have to do those things for us to attract the creme de la creme. I think the other banks have clearly embarked on that journey, and now we’re just catching up with them.”