Thai Mortage Lending Practices

[ronswelters2]

Since home mortgage financing is open only to Thais, information is sparse and confusing, but I need to understand what is going on.

On the surface it would appear that Thai normally take long loans with initial teaser rates of about 2% that increase in year 3 to "MLR" (now 5.8%) minus maybe 0.5%, but plan to cancel and refinance at what they hope will be the same terms 2-3 years out. There is no assurance that an inflationary cycle wouldn't cause MLR to rise to 10% and the teaser rates to disappear.

Thus it would appear that people's payments could shoot up perhaps 500 percent which would of course be unaffordable for most.

Is it then true that there are no "real" mortgages in Thailand and homeowners are living on short term financing with the expectation of continuing low inflation? What kind of system is this?

Any sources of commentary or background information links would be much appreciated.

Thanks, Ron

[TerryLH]

"Is it then true that there are no "real" mortgages in Thailand and homeowners are living on short term financing with the expectation of continuing low inflation? What kind of system is this?"

There are 'real' mortgages here. Contact any housing project or bank doing real estate loans and they can give you examples.

The housing places usually have pre-printed handouts showing what your payments would be in a couple of different scenarios (Amount owed and number of years paying).

[Soutpeel]

"Is it then true that there are no "real" mortgages in Thailand and homeowners are living on short term financing with the expectation of continuing low inflation? What kind of system is this?"

There are 'real' mortgages here. Contact any housing project or bank doing real estate loans and they can give you examples.

The housing places usually have pre-printed handouts showing what your payments would be in a couple of different scenarios (Amount owed and number of years paying).

Yeap agree with Terry, if you qualify for a mortgage, the process if very straight forward and pretty transparent in my experience..

[Theyreallrubbish]

Since home mortgage financing is open only to Thais, information is sparse and confusing, but I need to understand what is going on.

On the surface it would appear that Thai normally take long loans with initial teaser rates of about 2% that increase in year 3 to "MLR" (now 5.8%) minus maybe 0.5%, but plan to cancel and refinance at what they hope will be the same terms 2-3 years out. There is no assurance that an inflationary cycle wouldn't cause MLR to rise to 10% and the teaser rates to disappear.

Thus it would appear that people's payments could shoot up perhaps 500 percent which would of course be unaffordable for most.

Is it then true that there are no "real" mortgages in Thailand and homeowners are living on short term financing with the expectation of continuing low inflation? What kind of system is this?

Any sources of commentary or background information links would be much appreciated.

Thanks, Ron

The Thai initial teaser rates is the same as the Option Arm mortgage that is about to explode in the United States and cause the second leg of the financial crisis.

Wachovia even called them "Pick a payment" mortgages and they were even more extreme in that people could choose a negatively amortising mortgage for the first few years!

The initial teaser rate is standard in mortgage markets. Its supposed to allow you to have lower payments in the first couple of years when expenses are high and to allow earnings to rise. In reality it allowed house prices to be bid higher than was supportable.

In Thailand its not as bad as they maintained underwriting standards that the borrower must be able to pay the mortgage after the teaser expires, which they didn't do in the US or UK. I remember asking HSBC in the UK how much I could borrow and they came back with a figure way in excess of what I would have thought was sustainable, even if I'd switched my diet to Ramen noodles.

[12DrinkMore]

even if I'd switched my diet to Ramen noodles.

Thank you so much, never heard of Ramen noodles, but now I know

Very important to wash your hands...........

:D

[nakachalet]

FOR THAI CITIZEN (WIFE OR HUSBAND OF FARANG) ONLY

initial or first time home buyers could also approach SUNG KOM SOONG KOH BANK ธนาคารอาคารสงเคราะห์, a government owned financial institution.

potential burrowers could also apply for second mortgage at a low interest rate.

many thai business associates have been using this government bank for years. at time of hardship, the bank will also reduce and/or extent your monthly payment.

the bank does not provide home loan for pure farang though.... borrowers need to show thai id card.

the lending rate is around 4-5% per annum.

--------

TO THEYREALLRUBBISH

hsbc and other lending institutions in the west generally apply the rule of about 33% of your income as a lending guideline, which means your maximum affordable monthly mortgage payment including water, power and light, insurance et cetera, et cetera, should be below the 33% of your income.

which brand of raman do you prefer friend? a truck load from burmese border can be real cheap, maybe 2 baht per package? or do you prefer cif delivery?.... lol

as it appears, mortgage lending in thailand is a bit more stringent than our home country. if the rich who controls the majority decision in most lending institutions is to relax their lending practices a bit, enabling many lower middle income persons/families including many lower income families.... to own home of their own.... the general economy conditions in thailand would change significantly.... the economic gap between the rich and the poor would be also narrowed....

Edited September 19, 2009 by nakachalet

[Time Traveller]

Is it then true that there are no "real" mortgages in Thailand and homeowners are living on short term financing with the expectation of continuing low inflation? What kind of system is this?

Thanks, Ron

Well a better one than which has been followed in the US.

Typically banks only lend at 70% of appraised value. I don't think borrowers can refinance to the introductory rate again after first time without paying some sort of penalty. And I don't see how loan repayments could go up 500% (5 times) if the MLR went to 10%. In anycase, you're assuming that the BOT would lift rates above the inflation rate even when many homeowners are going under water. I doubt that they'd stand for that. If there really was a spike in inflation then expect negative real interest rates, at least until mortgagees get their heads above water again.

[Soutpeel]

Is it then true that there are no "real" mortgages in Thailand and homeowners are living on short term financing with the expectation of continuing low inflation? What kind of system is this?

Thanks, Ron

Well a better one than which has been followed in the US.

Typically banks only lend at 70% of appraised value. I don't think borrowers can refinance to the introductory rate again after first time without paying some sort of penalty. And I don't see how loan repayments could go up 500% (5 times) if the MLR went to 10%. In anycase, you're assuming that the BOT would lift rates above the inflation rate even when many homeowners are going under water. I doubt that they'd stand for that. If there really was a spike in inflation then expect negative real interest rates, at least until mortgagees get their heads above water again.

TT, agree with you, believe the OP is repeating an Thai urban myth he heard in the bar....

My wife has a mortage on which I co-signed for on a property, it was for 100% value of the property and the interest is 5.2% pa, there where no "teasers", there have been no increases etc...So can comfirm in my wifes/mines case have seen a 500% increase in repayments...

[gosompoi]

The same bad lending practices have already been a disaster in America but the thai have not learned the lesson yet.

[grin]

Here's what we have been offered by Bangkok Bank here in Chiang Mai for a mortgage:

I will be the guarantor for my wife who has no income

The first year's interest will be 2%

Subsequently the interest will be about 5% (I have not been able to get them to be specific, so this is a possible deal breaker)

The minimum term is 3 years

The maximum term cannot go past my 65th birthday

The maximum loan amount is 50% of the land and house value combined

The minimum monthly income must be 3 times the payment at the higher interest rate

The remaining amount to be paid by me after accounting for the deposit and prepayments to the builder

must be deposited in a Bangkok Bank savings account before the application will be considered

There are prepayment penalties for paying off before 3 years (no matter how long the loan term is)

The bank manager explained that if I want to pay the mortgage off early then I should pay off 95% of the principal,

keep the account open, and make minimum payments until the 3 years is up and then pay it off and close the account

I have not been able to get this info in writing from them so this is strictly my interpretation

Also note that this mortgage application has not been started yet as I am not satisfied with all of their answers yet

If anyone has more info on Bangkok Bank mortgages it would be appreciated

Grin

[skybluestu]

Here's what we have been offered by Bangkok Bank here in Chiang Mai for a mortgage:

I will be the guarantor for my wife who has no income

The first year's interest will be 2%

Subsequently the interest will be about 5% (I have not been able to get them to be specific, so this is a possible deal breaker)

The minimum term is 3 years

The maximum term cannot go past my 65th birthday

The maximum loan amount is 50% of the land and house value combined

The minimum monthly income must be 3 times the payment at the higher interest rate

The remaining amount to be paid by me after accounting for the deposit and prepayments to the builder

must be deposited in a Bangkok Bank savings account before the application will be considered

There are prepayment penalties for paying off before 3 years (no matter how long the loan term is)

The bank manager explained that if I want to pay the mortgage off early then I should pay off 95% of the principal,

keep the account open, and make minimum payments until the 3 years is up and then pay it off and close the account

I have not been able to get this info in writing from them so this is strictly my interpretation

Also note that this mortgage application has not been started yet as I am not satisfied with all of their answers yet

If anyone has more info on Bangkok Bank mortgages it would be appreciated

Grin

I was also told similar information from my local Bangkok Bank branch manager but it's actually people down in Bangkok who make the decisions. My branch manager told me they would definitely lend 60% of the value of the house/land over 15-20yrs but the bods in BKK said no. So we tried again for 50% and they again said no. Finally, after about 3 months, they said they would lend 40% but only over 10yrs! So be careful relying on what the people in your local branch tell you because it's not them who make the decisions, it's all done in BKK now.

[ronswelters2]

Here's what we have been offered by Bangkok Bank here in Chiang Mai for a mortgage:

I will be the guarantor for my wife who has no income

The first year's interest will be 2%

Subsequently the interest will be about 5% (I have not been able to get them to be specific, so this is a possible deal breaker)

.........

Grin

This is helpful and much as I understand the situation. The "about 5 percent" I believe is this thing called MLR which is now 5.8 % and they reduce that by 0.5 percent. But there are three problems as I see it:

1. Can you afford to jump from 2% to 5% in three years? That's a big increase.

2. Why isn't as likely as not that the MLR will be say 8% in three years? I would expect that it would follow inflation.

3. None of these options offer the assurance of a traditional fixed mortgage rate which allowed for real long term assurance. It seems that nowadays the world is in an "eat drink and be merry" mode and is ready to snap at the 2% bait rather than face the reality that the real long term cost of money is maybe 6%.

Yes, this is exactly what happened in the US, with woeful underwriting standards as well.

One local assurance might be that the Thai banks have to go to a lot of trouble to foreclose, takes years.

But soemthing seems wrong here, the whole thing seems unstable to me. Are the bankers stupid? Hardly seems likely.

Ron

[Soutpeel]

Here's what we have been offered by Bangkok Bank here in Chiang Mai for a mortgage:

I will be the guarantor for my wife who has no income

The first year's interest will be 2%

Subsequently the interest will be about 5% (I have not been able to get them to be specific, so this is a possible deal breaker)

The minimum term is 3 years

The maximum term cannot go past my 65th birthday

The maximum loan amount is 50% of the land and house value combined

The minimum monthly income must be 3 times the payment at the higher interest rate

The remaining amount to be paid by me after accounting for the deposit and prepayments to the builder

must be deposited in a Bangkok Bank savings account before the application will be considered

There are prepayment penalties for paying off before 3 years (no matter how long the loan term is)

The bank manager explained that if I want to pay the mortgage off early then I should pay off 95% of the principal,

keep the account open, and make minimum payments until the 3 years is up and then pay it off and close the account

I have not been able to get this info in writing from them so this is strictly my interpretation

Also note that this mortgage application has not been started yet as I am not satisfied with all of their answers yet

If anyone has more info on Bangkok Bank mortgages it would be appreciated

Grin

Sounds a lot like the deal Mrs Soutpeel (who was still the GF at the time) got from SCB a few years ago as regards some of the T&C's re 3 years etc.

Mrs Soutpeel managed to get 100% loan at the time with me as co-sig, however never had an "introductory" interest rate been 5.2% since day one and never increased..

[emsfeld]

Nothing unusual about these kinds of mortgage products.

1) No bank in any country, to the best of my knowledge, offers you fixed rate mortgages. What they do is to lock in a rate for 5 years which will then be reset. This is what they call a fixed rate. Since no one knows what the MLR will be in 5 years time (best guess is forward rate at time of initiation), you will have the same effect - meaning the rate will reset to whatever the MLR is then (or more likely its forward rate to next reset date) plus some premium.

The difference then is that the Thai rates are variable and reset every three - six months (rates being variable doesnt mean they vary on a daily basis). Fixed rates will always be higher than variable rates (at time of initiation and maybe even for a good part of the term of the loan). So sometimes you win, sometimes you loose. At the moment and for the next 3 or so years, I personally see variable rates as being the better (cheaper) option.

2) These kind of mortgage arrangements did NOT cause the collapse - the collapse was caused by poor, immoral lending practices, leveraging against the equity increase in value of existing properties, people's naivity to believe that good times never end and so forth. In one word - greed.

3) The shock of '97 is still sitting deep in the banks' minds. Their loan assessment practices have improved considerably. Nowadays it is much harder to get mortgage loans in Thailand than anywhere I know. I am living in OZ at the moment and the banks are very quick at handing out finance, sometimes up to 90-100% (eg almost no equity funding required from your end) of market value. This has to some extent changed now, but was fact up until late 2007. Thai banks were considerably more conservative back then and, in fact, haven't changed their practices to my knowledge.

[trogers]

Nothing unusual about these kinds of mortgage products.

1) No bank in any country, to the best of my knowledge, offers you fixed rate mortgages. What they do is to lock in a rate for 5 years which will then be reset. This is what they call a fixed rate. Since no one knows what the MLR will be in 5 years time (best guess is forward rate at time of initiation), you will have the same effect - meaning the rate will reset to whatever the MLR is then (or more likely its forward rate to next reset date) plus some premium.

My first condo bought back in 1994 was mortgaged on a fixed interest rate for its entire 10-year loan period. Not from a bank, but AIA. Good thing I did that as interest rate shot up to almost 20% during 1997-2001.

[Valjean]

I found UOB more flexible and better terms than Bangkok Bank

[emsfeld]

Nothing unusual about these kinds of mortgage products.

1) No bank in any country, to the best of my knowledge, offers you fixed rate mortgages. What they do is to lock in a rate for 5 years which will then be reset. This is what they call a fixed rate. Since no one knows what the MLR will be in 5 years time (best guess is forward rate at time of initiation), you will have the same effect - meaning the rate will reset to whatever the MLR is then (or more likely its forward rate to next reset date) plus some premium.

My first condo bought back in 1994 was mortgaged on a fixed interest rate for its entire 10-year loan period. Not from a bank, but AIA. Good thing I did that as interest rate shot up to almost 20% during 1997-2001.

Just did some more research on this and there seem to be some banks that offer fixed rate mortgages to up to 15 years (in Europe). Of course, there is no mention though as to how high that rate is going to be . Most of them do reset their fixed rate after 5 years though.

[Benjie]

My wife's mortgage with Bangkok Bank was for 90% of the value of the house/land and had a starter rate of 2% rising to MLR-0.5% after the first year.

HOWEVER - The amount she paid monthly in the first year is identical to the amount she had to pay in future years, i.e she pays exactly the same each month now as she did in the first year. What happens is that less interest was applied throughout the first year and thus more of the principal was paid off.

[trogers]

My wife's mortgage with Bangkok Bank was for 90% of the value of the house/land and had a starter rate of 2% rising to MLR-0.5% after the first year.

HOWEVER - The amount she paid monthly in the first year is identical to the amount she had to pay in future years, i.e she pays exactly the same each month now as she did in the first year. What happens is that less interest was applied throughout the first year and thus more of the principal was paid off.

If MLR rises above the rate it was when mortgaged is signed, monthly payment remains the same but period of payback will be extended...

[emsfeld]

Interesting article touching on this issue as well at:

http://www.nuwireinvestor.com/articles/pol...tate-53688.aspx

This may also be answering the OPs questions to a large extent (from above article):

Most loans are 25 to 30 year adjustable-rate mortgages (ARMs). However, Thai ARMs have some characteristics of fixed rate mortgages (FRMs), because banks are prohibited from increasing installment payments more than once per year, and cannot increase them more than 10%.

[CaptHaddock]

Nothing unusual about these kinds of mortgage products.

1) No bank in any country, to the best of my knowledge, offers you fixed rate mortgages. What they do is to lock in a rate for 5 years which will then be reset. This is what they call a fixed rate. Since no one knows what the MLR will be in 5 years time (best guess is forward rate at time of initiation), you will have the same effect - meaning the rate will reset to whatever the MLR is then (or more likely its forward rate to next reset date) plus some premium.

You must be a Brit. In the US fixed-rate 15 and 30 year mortgages have been the norm since the 1940's. Floating rate loans began to be popular in the 70's and 80's, disappeared for a while when interest rates were low and then came back to contribute the bubble in the mid-90's.