San José, Costa Rica, since 1956

Mortgage Market Growing, But Still Pricey

Costa Rica’s mortgage market has come a long way in recent years, though conditions for expatriates buying homes here are still less favorable than those in the United States or Canada, according to those familiar with the industry. However, with an increasing number of foreign visitors falling in love with the country and buying second homes here, rates are likely to become more competitive.

At a recent event hosted by the Costa Rican-North American Chamber of Commerce (AmCham) and Land America, industry leaders discussed how the nascent Costa Rican market has progressed since the introduction of the first long-term dollar mortgages in the mid-1990s, and the challenges still facing the market.

Les Nunez, founder and president of First Realty S.A. in Playa Hermosa, Guanacaste, told The Tico Times financing here “is no picnic,” thanks to high interest rates that are frequently recalculated, but that increased competition from foreign banks is likely to improve conditions.

High Interest, Short Term

Rates in the U.S. market, for example – as low as 3-4% a year ago – now average 6%, with terms, which is the period after which the lending institution can recalculate the interest rate, of 3-5 years, Nunez told The Tico Times. However, Costa Rican banks offer rates of about 8% on dollars, or 12-20% on colones, and recalculate interest rates every few months. (Usually, dollar loans are available only to those who can prove an income in dollars.)

In other words, a borrower in the United States with a 20-year mortgage might have to renegotiate his or her interest rate with the bank every five years, giving the lender a way to adjust for changing market conditions. In Costa Rica, however, the rules of the game change much more frequently, to the dismay of some mortgage holders.

In addition, mortgage amortizations, or the total repayment on the loan, tend to be shorter term here than in other countries, Banco Interfin General Manager Luis Liberman said at the AmCham-Land-America breakfast. Costa Rican borrowers are typically averse to 20- or 30-year loans, paying back their mortgages as quickly as possible, partly because the country’s tax structure provides no fiscal benefit for people to carry long-term mortgage debt, he said.

Nunez agreed.

“Costa Ricans are very interest-rate averse” when it comes to housing loans, though this often does not apply to credit card debt or car loans, he said, citing the country’s strong tradition of home ownership as one cause. “We tend to be very nomadic in housing – in the United States, people change houses every four years, according to the National Association of Realtors. But in Costa Rica, people hand down houses for generations.”

Another factor for which foreign borrowers should be prepared is the loan-to value ratio of mortgages here, according to Nunez. Many lending institutions – including public and private banks and foreign mortgage brokers – advertise a 70% ratio. On a home valued at $100,000, the institution lends $70,000.

However, there’s a major caveat: the “value” of the home is determined by that institution’s own appraisal, which tends to come in well under what the sale price of the home might be, the realtor said. The bank’s appraisal might value that $100,000 home at $80,000, then offer 70% on that lower amount, meaning that the borrower gets closer to 50% of the total sales price.

The loan-to-value ratio on second homes is even lower, usually about 60%, Nunez added – another difference from the United States, where a borrower will likely receive the same ratio and terms on a beach house or ski chalet as on a primary residence.

Liberman said that secondary homes tend to be higher-risk for banks, since any homeowner facing financial problems is more likely to give up a second home than a primary residence.

Banks also take into account the financial assets that buying a second home implies.

“They figure, if you already have that equity up there (in your country of origin), you can afford it,” Nunez said.

On the Horizon

The market here is bound to improve for Costa Ricans and foreigners alike, thanks to increased competition, industry observers say. Interfin was Costa Rica’s largest private bank and a leader in the mortgage market; recently, Canada-based Scotiabank purchased Interfin for $293.5 million. The combined operation will account for 13% of the Costa Rican loan market (TT, June 16).

Other foreign banks such as El Salvador based Banco Cuscatlán are becoming increasingly aggressive within the mortgage market, Nunez said, causing other banks to expand their services.

Jorge Volio, president of Volio Capital, said at the June 23 AmCham event that the second-home boom, particularly on the Pacific coast, will expand the market as well.

“The quantity of second homes for investors or (retirees) is enormous…that will bring more and more participants” to the mortgage market here,” he said.

According to Liberman, one important challenge for Costa Rica is improving access to credit information for lending institutions in Costa Rica, where many mortgage decisions must be made on the basis of paper documentation, such as bank statements, provided by applicants.

“It’s a serious problem,” he said. “We don’t have in Costa Rica a system like those that exist in developed countries to monitor personal debts.”

Buoyed by the accurate credit information lenders can obtain for buyers in Costa Rica who have assets in the United States, some foreign mortgage brokers offer loans with U.S. assets as leverage. Although the Superintendence of Financial Entities (SUGEF) does not recognize private mortgage brokers, with a few exceptions, brokers established elsewhere can still advertise and offer loans to foreigners buying homes here, Nunez said.

“Foreign mortgage brokers can’t set up shop because it’s very tightly controlled,” he explained.

Another option for foreigners buying or selling homes here is to opt for owner financing, or housing loans from the seller to the buyer, he added. This strategy can benefit both parties – the buyer doesn’t face the same requirements and scrutiny a bank loan involves, and the seller, because of the high mortgage rates in Costa Rica, can get a good return.

“It’s a final alternative for expatriates coming here. It’s easy…because what they’re lending on is the real value of the home,” Nunez said. “It has a risk, but you don’t get (those rates) without risk.”


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