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The Mortgage Term

The typical mortgage term available for residential mortgages in Trinidad and Tobago is 25 years, though occasionally 30-year mortgages are available. The maximum term is limited by the stipulation that the mortgage becomes due at the borrower’s retirement age or when he/she reaches the age of 60 (or 65) years. The Government has moved to ease this restriction in respect of public sector housing.

Fixed or Variable-Interest Rates

As mentioned earlier, in the US and the UK, there are clear options between fixed and variable-interest rate mortgages. In a standard fixed-interest rate mortgage, the interest rate remains unchanged throughout the life of the loan while in a variable-rate mortgage, the interest rate changes based on pre-determined criteria.

In Trinidad and Tobago, most mortgages are deemed to be extended on a variable-interest rate basis since the contract allows the lender to vary the interest rate with three to six months’ notice. In practice, however, the rate is adjusted rather infrequently. In the face of a steady reduction of interest rates from late 2004 through most of 2005, some commercial banks exercised the option to reduce rates on existing mortgages. Later, in response to the rise in the ‘Repo’ rate, some mortgage rates were increased during 2006.

Eligibility

Mortgage institutions take account of several criteria in deciding an applicant’s eligibility for a mortgage loan. The most important of these are (i) the indebtedness of the borrower, defined as the ratio of the borrower’s monthly debt service payments to his gross income (ii) the instalment ratio, which is the ratio of debt service of the mortgage debt to income and (iii) the repayment risk, which is contained, in part, by the ratio of the size of the loan to the assessed value of the property.

Information on the applicant’s credit history is also factored into the decision to grant the loan. Tolerance limits for the instalment/income ratio vary from a maximum of 30 per cent to 35 per cent while the maximum for the total debt service ratio is 40 per cent. The loan-to-value ratio accepted by most lending institutions usually ranges from 75-80 per cent. In exceptional circumstances, a few lenders go as high as 95 per cent (see Table 4). The Insurance Act limits loan-value ratios for insurance companies to 75 per cent.

Key Mortgage Credit Evaluation Ratios

Fees and Closing Costs

Lenders safeguard their security by insisting that the property which is the subject of the mortgage, is fully insured on a replacement- cost basis. Of course, the insurance also safeguards the asset of the borrower. The initial and annual insurance premiums are for the account of the borrower. Lenders also require life insurance on the life of the borrower so that the loan is covered in the event of the borrower’s death.

There are a number of one-time costs involved in securing a mortgage, which must be borne by the borrower. These include the application fee, the title search fee, the commitment fee, the stamp duty on the Deed of Conveyance (which allows the transfer of the property to the new owner), the stamp duty on the Deed of Mortgage and legal fees. Application and title search fees tend to differ among lending institutions. In the case of the application fee, these range between TT$500 — TT$1 ,000, while the title search fees depend on the type of property and the complexity of the search. For a mortgage of $450,000 total fees could exceed 1 per cent of the value of the mortgage.

Some mortgage lenders tend to discourage payments made in excess of the scheduled principal repayments by imposing a prepayment penalty. These prepayment penalties could be as high as three to six months interest payments. In the face of intense competition in the mortgage market, some lenders are now waiving the prepayment fees, if given three months’ notice by the customer. A prepayment plan that is being offered by at least one mortgage lender provides for 13 instead of 12 installments per year. As noted earlier, this prepayment scheme will result in savings on interest payments of about 23 per cent.