Actualidad Colombia

Elimination of minimum installment for home loans

Bill 156-C/2014

Act 546/1999 established the general framework and standards regulating home loans in Colombia. Amongst other aspects, it tried to encourage more buyers for both newly built and second-hand homes, as well as to boost the number of new homes built. These were laudable goals, especially at the end of the last century, in a context in which Colombia was trying to tackle the consequences of a financial crisis that had to some extent been caused by an imperfect mortgage market.  However, the act did not go far enough for the home owners that needed an affordable mechanism to finance improvements to their homes, as they had to access other lines of credit to do so, which were usually more expensive than mortgage-based loans.

This bill is intended to make up for this gap in the legislation, by extending the application of Act 546 to lines of credit requested for the funding of owner-occupied home refurbishment, repair or improvements. It would also allow such lines of credit for a term of less than five (5) years, provided home-owners’ creditworthiness makes this financially feasible. The bill would incorporate the possibility of presenting collateral other than a mortgage for cases in which the home loan is for the refurbishment, repair or improvement of the owner’s home.

Additionally, the bill includes a provision that “in view of the borrower’s repayment capacity, and verifying the conditions established in section number 9 herein, mechanisms will be establish to finance individual home loans that will allow for funding of up to one hundred per cent (100%) of the property’s value”. This aspect should be carefully analysed by the legislator and by the financial industry. At first sight, one might think it would facilitate access to home loans. However, it will be vital to avoid people taking on more debt than they are able to repay. In this sense, the bill does not make it clear under which conditions it would be feasible for a borrower to finance their home with 100% leverage.

A 100% Loan-to-Value Ratio in Colombia, where practically all loans have a 70% LTV, will mean that additional collateral may need to be required, over and above that of the property whose acquisition is being financed. This is something that lenders should study in depth. Their involvement is important, as they have experience enabling them to understand what impacts such a measure could have on the Colombian housing market. Nobody should forget that excessive housing credit leverage, without due mitigation measures, was one of the causes of the latest international financial crisis.