by Jonathan Kent
Credit is the lifeblood of the construction industry – most development could not happen without it. Hence, the banks’ ability and appetite to lend plays a pivotal role in the health of the sector. RG Construction spoke with Shawnette Griffin, head of Butterfield Bank’s consumer credit department, to get the lowdown on borrowing.
What happens when someone inquires about a mortgage?
We give them an application form and they complete a personal financial statement, which lists their income and fixed expenses. We verify income and discuss how their down payment would be funded. Then we can advise them how much they would be able to borrow. We can also provide them with a pre-approval letter that they can take to the realtor to show that a purchase is within their borrowing power.
How is the required down payment calculated?
Our standard down payment for purchasing a property is 30 per cent. When the client cannot fund it all, we can offer third-party financing, if a relative has a property they are willing to use to assist. If we’re lending the client the full amount and we’re using a secondary property to offset the down payment, the secondary property can be considered for release once the client has paid down their debt by that down payment figure.
How does a loan to renovate or build a property differ?
In this case, the client can use the equity in their existing home or land to do the construction financing. If they want to develop on their land, they would come in with the plans and a cost estimate. The appraiser estimates that the value of the completed property will be x. We then ensure the amount we lend does not exceed 70 per cent of that number.
Are the loan funds paid out up front?
No, the funds are drawn down in stages. When the contractor has finished phase one, then the project manager would send us an invoice and we would advance those funds to cover that stage. And so on throughout the duration of the project.
Why are lending rates so high in Bermuda, compared to say, the US? Are there particular risks here?
Bermuda doesn’t have a central bank, or a lender of last resort, so the bank must maintain a higher capital level, so we can’t deploy as much capital to invest or lend as overseas banks.
The real estate market is smaller here. If a borrower defaults and if the bank forecloses, the possibility of selling the property in a timely manner – allowing the bank to recoup the value of the mortgage – is lower.
Some overseas banks offload some risk by packaging loans and selling them off. Butterfield does not engage in the securitisation of mortgages. So our revenue stream is very much attached to the full amortisation period of the mortgage, as long as 30 years. All of these risks are reflected in the price.
How has the pandemic affected loan appetite?
Mortgage applications fell during the shelter-in-place period, but recently we’ve seen them pick up. Last year we offered payment deferrals of up to six months to assist clients. That has finished but we continue to work clients on an individual basis.