Thu | Feb 11, 2016

Homebuyer ignorance

Published:Sunday | October 14, 2012 | 12:00 AM

Marcella Scarlett, Business Reporter

The marriage of public and private mortgages in a single mortgage application has helped to bring down the cost of home ownership in recent years.

But homebuyers still face a big hurdle: upfront transaction costs and deposits that for many are unaffordable and often end up killing their dream of home ownership.

Additionally, many prospective real estate investors are unaware of the different types of fees they will incur when setting out to buy a house.

In an informal survey of construction industry and real estate experts, Sunday Business estimated that the buyer of a J$7-million house, which falls within the mid-income market segment, would need to have at least J$750,000 of upfront cash to cover a series of professional and other fees, including about $300,000 to cover costs related to processing the mortgage.

The fees may vary across mortgage houses.

All these are in addition to the five per cent or 10 per cent deposit normally required, depending on the lending institution. The deposits could push total upfront costs above J$1.1m at five per cent deposit and above J$1.4 million at 10 per cent deposit. Private mortgage lenders typically finance about 90 per cent of the home purchase price, requiring the buyer to finance the other 10 per cent out of pocket.

Buyers who chose the lower five per cent deposit may face additional indemnity charges imposed by the mortgage lender.

For many buyers, especially first-time buyers, trying to buy real estate in Jamaica can be a big headache as they are oftentimes unaware of the total cost associated with the transaction, several industry players said.

According to Andrew Issa, CEO of Coldwell Banker Realty, this ignorance can frustrate the buyer, the seller, the financier, the attorney and all other parties involved and may even lead to the purchaser having "no choice" but to abandon the transaction altogether.

Several financiers in the real estate business also says that closing transactions are oftentimes slow, delayed or in some instances even totally scrapped because buyers are oftentimes unaware of these costs.

"Oh Lord, it slows down the process, it definitely does - significantly slows down the process,"

stressed Easton Douglas, chairman of state-run National Housing Trust (NHT).

"What happens is that a lot of time the buyers know that there are cost associated with purchasing properties but they are not clear about the amount that they should be looking at," said Issa.

"Now what you find is that it is after they have found the property that they realise the amount of money they need to have access to outside of the mortgage and this oftentimes frustrate the process," he said.

The biggest cost associated with the purchase, outside of the deposit is usually legal fees. Indeed, Sunday Business checks indicate that many persons are ignorant of the fact that the real estate transaction requires the input of lawyers.

Legal fees are calculated at three per cent of the asking price of the property plus GCT and in the case of the J$7m property can cost the buyer approximately J$244,650, according to calculations supplied by Jamaica National Building Society (JNBS), the largest private mortgage provider.

The buyer is also required to pay 0.75 per cent of the vendor's legal fees after they have applied for the mortgage, which in this example would amount J$61,162 - as well as make provisions to pay for the preparation of the sale agreement, which may cost another J$30,000.

miscellaneous fee

There is also a J$10,000 provision for miscellaneous cost.

This miscellaneous fee is to cover the attorney's cost to prepare letter for utility companies and prepare other letter said Keisha Melhado, senior mortgage manager at JNBS.

Additionally, the buyer is required to pay the Government 1.5 per cent of the price of the property for stamp duty and registration fee of 0.25 per cent. For our transaction this comes to J$105,000 and J$17,500, respectively.

After the buyer applies for the mortgage, they are required to pay an additional 0.625 per cent of the asking price for stamp duty and 0.5 per cent for registration fee in the amounts of J$44,260 and J$35,000, respectively.

Lending institutions charge a mortgage indemnity reserve, which Melhado says is not refundable.

"Once you are borrowing in excess of two-thirds of the lower of the price or the value of the property, then you have to pay a mortgage indemnity reserve on the excess of the two-thirds. It is like insurance - you don't get it back when you finish paying off the loan," she said.

For the transaction, JNBS calculates a mortgage indemnity reserve of J$122,500.

The buyer will need to look at processing fees and commitment fees which varies across institutions, hire a land surveyor to produce a surveyor's ID report on the property at a cost of 0.3 per cent of the property value. This would add another J$21,000 to the bill.

A valuation report is also required from a land valuator, which is also another 0.3 per cent or J$21,000 charge on the J$7m purchase.

processing fees

Melhado says that JNBS charges 0.5 per cent plus GCT amounting to J$40,750 of the price for processing fees and has waived temporarily all processing fees for mortgage.

Victoria Mutual Building Society, the No 2 player, told Sunday Business that it is currently waiving both the processing fee and the commitment fee to make home ownership more accessible.

"Most times the purchasers are not aware of these costs until they are in the process of trying to get the property. Maybe the sort of thing that is necessary is that the sellers or the realtors try to advertise the price exclusive of closing cost or they may advertise the price with an estimated closing cost," said Horace Brian, vice-president of centralised services.

"Right now, the person buying will only know when they go to a mortgage broker, an attorney or to the realtor. It is going to be a challenge to get this information out there for people to remember," Brian said.

NHT's Douglas suggested that the solution could come in the creation of a "one-stop shop" where the buyer can get everything done under one roof rather than "having them run around all over the place struggling to find the documentation, getting a piece of the fees quoted here and another piece there".

He added that in other instances, buyers are not aware of the processes involved and this also slows the process "even when they have all the money".

There are also charges that the homebuyer will incur post-mortgage approval. Lenders tend to insist that the mortgagor insure their new asset, but those costs vary according to coverage across insurance providers.