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Is Mortgage = Konut Kredisi (home Loan) In Turkey

Below is a list of important changes that are brought with the new mortgage law in Turkey:

New Mortgage Products
Before the mortgage law, it was only possible to lend home loans at fixed interest rates. The law introduced floating interest rates (or a combination of fixed and floating rates) as an additional mortgage type. In floating rate loans, the interest rate is determined from the sum of a fixed margin that is determined by the lender and the inflation rate as measured by the Consumer Price Index. This way banks do not have to face the interest rate risk on their own and may share the risk with the borrowers. In summer of 2007, some banks started to offer variable interest rate loans but so far there does not seem to be much interest in this new type of mortgages and more than 99.9% of the loans are still fixed-interest rate mortgages.

Tax Benefits
Before the law passed on March 2007, there were some plans about providing tax relief to borrowers, however, the only tax relief mortgage law provided was a minor 5 percent Banking Insurance Operating Tax (BSMV) exemption and abolishment of several other smaller operating fees. As an example, before the law passed a monthly mortgage interest rate of 1.30% would be actually 1.3965%. For a 10 year loan of 100,000 YTL, with BSMV exemption the new mortgage law reduced the monthly payment of 1,722 YTL to 1,650 YTL, about 4.2% reduction in the monthly payments.

Loan Length
Before the mortgage law, Turkish banks could offer only shot-term loans up to a few years. This had a very limiting effect on the real estate economy in Turkey. Because of short maturities and high interest rates, funding of houses was mainly done with savings (60+ percent) and relatives/friends (about 25 per cent). The home loans were only making less than 5 percent of the total housing funding.
With the new law in effect for about 6 months, this picture started to change dramatically. The introduction of the new Turkish mortgage law already made a few banks (e.g., HSBC, Sekerbank and Finansbank) give loans up to 30 years to finance. It is expected that the other lending institutions will offer similar mortgages in the near future as interest rates decrease further and demand for longer mortgages continue to increase.

Lending Institutions
Before the mortgage law, only deposit, investment and participation banks could issue home loans. Under the new law, however, consumer funding companies are able to issue home loans too. A few mortgage companies are in the process of starting their operations; it is likely that the growing competition will lower the interest rates, which are very high when compared to those of developed countries. Let’s also note that as these new lenders are allowed to invest in capital markets to create funds for the home loans, it is expected that the financial markets will develop and will have indirect positive effects on the rest of the economy.

Early Payment Fee
Before the law, there was no penalty for early payment of the loan, however, due to the pressures from the banks, the new mortgage law included a penalty up to 2% if borrower pays before due date. This early payment fee is only valid for the fixed-interest rate loans. There is no penalty for the adjustable interest rate loans; they can close their accounts any time without incurring a charge.

Securitization of Loans
With the new law, banks are now able to bundle the loans into securities creating covered bonds and mortgage backed securities. Covered mortgage bonds and mortgage backed securities are debt securities backed by cash flows from mortgages and let the banks eliminate or share the mortgage risk with the rest of the world in a secondary market. Let’s also note that Turkey’s sub-investment grade sovereign rating may not be a big problem in the making good deals in the secondary market as covered bonds typically get higher ratings than the sovereign ratings of the countries. Therefore we expect that the secondary mortgage market is likely to stimulate the growth in the mortgage market substantially and decrease the interest rates when it starts to operate in early 2008.

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Factors To Consider Before Getting A Mortgage In Turkey

The Turkish residential mortgage market has grown significantly over the last few years mainly driven by falling interest rates. The New Mortgage law that passed in March 2007 further strengthened the legal background for both primary and secondary market triggering a sudden increase in the mortgage product variety. While there were only a few mortgage products before the new mortgage law, currently there are more than 20 different mortgage products for consumers.
However, the fast growth in the market has not been absorbed by the general public. Surveys show that more than 50% of the people don’t have sufficient understanding of the new mortgage system. Moreover, most people have the perception that the new mortgage system is a miraculous system that will let them buy houses without any savings and with very low monthly payments. This article addresses some of the misconceptions and draws attention to the reality by focusing on the real costs of mortgages.

Length of Loan and Interest Rate Relation: While some banks have started to offer mortgage loans up to 30 years in Turkey since the new mortgage loan passed in March 2007, currently the mortgage rates in Turkey are too high to get a loan with loan length of longer than 10 years. The consumers would be better off with loans less than 10 years.
To demonstrate the irrationality of getting a loan with a length of more than 10 years a simple comparison of monthly payments in a few cases will be sufficient. When monthly interest rate is around 1.30% for most banks, as it is in November 2007, monthly payment of only 2-year loan would be 4,877 New Turkish Lira (YTL). Extending the length of the loan to 10 years, would decrease the monthly payments to 1,650 Turkish Lira, a 82% reduction in the monthly payment. While 82% reduction in monthly payments is significant by extending the length of the loan by 8 years, a further extension in the length of the loan does not decrease the monthly payment significantly. For example, if the length of the loan is assumed to be 20 years, the monthly payment will decrease to 1,361 YTL, an additional 18% reduction from the monthly payment in one-year loan. So increasing the length of the loan an additional 10 years decreases the monthly payment by only 18% more. Even more interestingly, for 30-year loan, the monthly payment decreases to 1,313 YTL, an additional 4% reduction in the monthly payment for another extension of 10 years in the loan.
Let’s note that if the interest rates were lower, the optimum point for length of loan would be more than 10 years. For example, if the monthly interest rate were 0.5%, the reduction in the monthly payments would be 87%, 35% and 16% for 10 year, 20 year and 30 year loans respectively (as opposed to 82%, 18% and 4% with 1.3% monthly interest rate). Similar length of loan comparisons can be computed with a mortgage payment vs. length of loan comparison calculator.

Cost of the loan: Interest rates, commissions and fees
The most important thing consumers should do is calculating the real cost of the loan. The cost of loan includes the interest rate, expertise costs, insurance costs and most importantly, fees and commissions.
While interest rates of the banks are usually available on their web pages, most banks do not choose to publicize the commissions and fees upfront. There are cases when consumers apply for mortgage and goes through all the paperwork without any clue about the fees up until the last steps. Since it is usually known that fees are overlooked by the consumers, some banks offer low interest loans with significantly higher fees, which turn out costlier than the high-interest loans. Such incidents can be avoided if the consumers search internet for the mortgage costs. Kredihavuzu.com provides comprehensive information about the mortgage costs for every bank. Effective interest rates should be calculated to compare the real costs of the loan across different mortgage products with fees included in the costs.

Early Closure Fees:
Early closure fees up to 2% of the remaining loan apply to the fixed interest mortgages. Adjustable rate mortgages can be closed without any closure fees. If you have a fixed interest mortgage and interest rates fall, it may be harder to refinance. You may use the advanced refinance calculator to find the best refinance options for you.

Expertise Expenses :
Before applying for a mortgage, consumers should make sure that the real estate that they plan to buy is eligible for mortgages. Otherwise, consumers may need to pay the expertise expenses (between 250 to 600 YTL) without being able to get the loan.

Berk Akman is working for KrediHavuzu.com, Turkey’s leading online mortgage services company dedicated in providing up-to-date interest rate and fee information of the lenders, various mortgage tools and products for optimal mortgage design.