Comparison of House Loan Offers to AUB Faculty and Staff

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1 Comparison of House Loan Offers to AUB Faculty and Staff General Overview 1. BLOM Bank BLOM bank offers four different loans that satisfy different purposes. The first category of loans is offered in LBP in cooperation with the Institution of Public Housing (IPH) at a rate of 4.57% (20% Treasury Bills for 2 years %) for a maximum period of 30 years. The main disadvantages of this loan are: Maximum loan amount that is limited to 270 Million LBP Salary should be less than 5 Million LBP Another offer targets the purpose of buying a primary house (Darati) but is far more flexible with some advantages and disadvantages. Advantages: No loan amount ceiling Down payment 0% Loan could be in USD or LBP Loan maximum duration is 25 years Disadvantages: Relatively high rates: Interest rate on USD Loan= 4.88% (Cost of funds + 2%) while interest on LBP Loan= 4.92% (40% of 1 yr T bill + 3%) for the first 15 years and rises to 7.81% (1 yr T bill + 3%) later. No Grace Period BLOM bank is also offering loans for apartments under construction (Darati Under Construction) with the same conditions as Darati except that the loan maturity is limited to 20 years and a 10% down payment is required. The last loan offered by BLOM targets faculty and staff seeking to buy an additional home, villa, or chalet. Such a loan is subject to the following terms: Advantages: No loan amount ceiling 1

2 Down payment of 0% Loan could be in USD or LBP Loan maximum duration is 25 years Disadvantages: Interest rate on USD Loan is 6.75 % for first year then a minimum 8% for the remaining years (LIBOR + 4%) Interest rate on LBP Loan is a minimum of 10% (1 yr T bill + 3%) No Grace Period Among the four offers, Darati and Darati under Construction are considered to be convenient to the largest segment of AUB faculty and staff. The offer in cooperation with IPH is limited to 270 million LBP and thus would be suitable for faculty and staff looking to buy a house within this budget. The last offer is suitable for those looking to fund a second house purchase but is available at relatively high interest rates. 2. Audi Bank Audi bank also offers a home purchase loan in LBP with the following characteristics: Advantages Unlimited ceiling Interest rate of 4.42% (40% of 1 year T bills + 2.5%) An optional 1 year grace period Disadvantages Down payment of 20% Loan maturity of 7 to 15 years. 3. Bank Med Bank Med s offer also carries a list of advantages and disadvantages. Advantages: A grace period that can reach 2 years Ability to extent the loan above 15 years up to retirement age Lowest interest rate in the first year (3.25%) and in the following 15 years (3.92% (40% of 1 year T bills + 2%) for a limited period. Loan maturity up to 30 years. 2

3 Disadvantages: Down payment of 15% Interest rate after year 15 rises to 7.31% (1 year T bill + 2.5%). 4. Banque Libano Francaise (BLF) BLF s offer is similar to Bank Med s mortgage loan offer on most terms but it charges slightly higher interest rates of 3.5% (instead of 3.25%) in the first year, 4.42% in years 2 to15 and 7.79% (1 year T bill + 3%) after year 15. However, BLF s offer carries two advantages: Ability to repay the loan up to the age of 75 Option of loan prepayment without charging any additional fees. 5. HSBC HSBC offers AUB faculty and staff three different products: Home Loan, Home Refinancing Loan and Equity Release Loan (i.e. borrow an amount based on the worth of an existing property). Home Loans and Home Refinancing Loans are offered at a rate of 3.99% for the first year and 4.04% (LIBOR %) for the second year onward, while Equity Release Loan is offered at a rate of 4.99% for the first year and 5.04% (LIBOR %) for the second year onward. All loans offered by HSBC are in USDs for a period of maximum 20 years with no grace period and allow a full or partial settlement of the loan starting day 2 with 1% fee of outstanding balance. 3

4 The tables below summarize the offers presented by each of the banks. Blom A (IBH) B (BDL) C D Target Income < 5m Darati Primary House purchase Darati Under Construction Purchase of Additional Home, villa, chalet Currency LBP LBP/ USD LBP/ USD LBP/ USD Max. Loan Value 270 million no ceiling no ceiling no ceiling Downpayment % case by case Collateral Registration & Stamp fees Interest Rate 4.57% (20% of 2 yr T bill + 3.5) LBP: 4.92% (40% of 1 yr T bill + 3%) Up to 15 years 7.81% (1 yr T bill + 3%) later LBP: 4.92% (40% of 1 yr T bill + 3%) Up to 15 years 7.81% (1 yr T bill + 3%) later LBP: Min 10% (1 yr T bill + 3%) USD: 6.75% for 1st yr. Min 8% (LIBOR+4% later) USD: 4.88% (cost of funds + 2%) USD: 4.88% (cost of funds + 2%) Period 30 years 25 years 20 years 20 years Grace Period NO Other OR Negotiation with developers for pool of apartments Bank acting as sponsor for development of residence tailored to professors needs (leading to discounted price for professors) 4

5 Audi BLF Med Target Home Purchase Home Purchase Home Purchase / Renovation Currency LBP LBP LBP Max. Loan Value 100,000,000 subject to reimbursement capacity no ceiling no ceiling Downpayment 20% 15% (either from AUB allowance or personal) 15% Collateral 0 Mortgage of 110% of loan + additional requirements Mortgage of 110% of loan + additional requirements Registration & Stamp fees LBP 0 LBP 0 LBP 0 3.5% for 1st yr 1st Year 3.25% Interest Rate 4.42% (40% of 1 yr T bill + 2.5%) 4.42% (40% of 1 yr T bill + 2.5%) till year % (40% of 1 year T Bills + 2%)(Up to 15 years) 7.79% (1 yr T bill + 3%) later 7.31% (1 year T Bills + 2.5%) (later) Period 7 to 15 years 30 years (up to age 75) Up to Retirement Age Grace Period 1 year 6 Months to 24 Months 6 Months to 24 Months Other Cash Back (Applies only for an interest of: 40% of 1 yr T bill + 3%): Any additional payment of loan amount would be 2% of the net loan amount for a period between 7 and 9 years exempted from any charges 3% of the net loan amount for a period between 10 and 15 years Credit card Credit Card + 32'' Samsung LCD and others 5

6 HSBC A B C Target Home Loan Home Refinancing Loan Equity Release Loan* Currency Max. Loan Value 85% USD 85% 60% Downpayment 15% 15% Collateral Registration & Stamp fees $0 3.99% for 1st yr 4.99% for 1st yr Interest Rate 1 year USD LIBOR (Currently 0.79) % 1 year USD LIBOR (Currently 0.79) % second year onward second year onward Period Grace Period Other up to 20 Years No Prepayment Option: fully/ partially settle the loan starting day 2 with 1% fee of outstanding balance Credit Card 6

7 Analysis 1. Varying Loan Durations Monthly Payment Table 1: Monthly Payments for a 750,000,000 LBP Loan for 15 Years Assuming No Grace Period Blom (B)* Blom (C)** Med BLF Audi HSBC(A or B) *** First Year LBP 5,900,000 LBP 5,900,000 LBP 5,270,016 LBP 5,362,000 LBP 5,707,000 $3,696 Year 2 to 15 LBP 5,900,000 LBP 5,900,000 LBP 5,502,000 LBP 5,686,000 LBP 5,707,000 $3,708 *Darati ** Darati under Construction ***HSBC loan is in USD The monthly payments during the first year and the following years assuming a Net loan amount of LBP 750,000,000 or equivalent in dollars ($500,000) for a period of 15 years with no grace period are shown in the table above. Looking at the monthly payments, Blom (B) Darati and Blom (C) Darati under Construction loans have the largest monthly payments of LBP 5,900,000 as Blom requests highest interest rate (4.92%) for the first 15 years compared to the other offers. However it is important to note that Blom (B) Darati is the only loan that requires no down payment and this would be the best choice for AUB faculty and staff who do not have cash reserves for the house down payment. Also, Blom (C) Darati Under Construction loan offer requires only 10 % as down payment, compared to the 15% and 20% required by the other banks. Bank Audi s offer is cheaper than Blom s with a monthly payment of LBP 5,707,000. However, it is still not as competitive as those of BLF and Med which offer a teaser rate in the first year of 3.5% and 3.25% respectively. Thus, as it appears from the table, Med s loan has an advantage over both BLF and Audi in terms of amount of payments. The advantage to BLF is that it offers AUB faculty and staff the ability to prepay the loan without any extra charges. The current negative spread between the rates on housing loans and deposits would however dis incentivize anyone from prepaying the loan and therefore the merits of such advantage are questionable from a financial standpoint for as long as this spread is maintained. HSBC s loan offer is in USD only, subject to teaser interest rate of 3.99% for the first year and 4.04% (LIBOR %) for the second year onward. HSBC s offer is more competitive than Blom Bank s USD Loan offer bearing the rate of 4.88% (Cost of Funds + 2%). Assuming constant LIBOR rates, the rate on HSBC USD loan would lower than all 7

8 offers. It is important to highlight however that an exchange rate risk is implicit in such a loan since any potential devaluation of the LBP against the USD (or Appreciation of USD against LBP) could make things worse for an employee who earns his salary in LBP but makes the payments in US dollars. Table 2: Monthly Payments for a 750,000,000 LBP Loan for 20 Years Assuming No Grace Period Monthly Payment Blom (B)* Blom (C)** Med BLF Audi HSBC(A or B) *** First Year LBP 4,917,000 LBP 4,917,000 LBP 4,254,000 LBP 4,350,000 LBP 5,707,000 $3,027 Year 2 to 15 LBP 4,917,000 LBP 4,917,000 LBP 4,502,000 LBP 4,696,000 LBP 5,707,000 $3,040 Year 16 to 20 LBP 5,270,000 LBP 5,270,000 LBP 4,886,000 LBP 5,093,000 N/A $3,040 *Darati ** Darati under Construction ***HSBC loan is in USD Monthly Payment Assuming the loan is for a period of 20 years, all monthly payments would decrease since the loan will be paid back over a longer period (Audi Bank s offer is not applicable for a period longer than 15 years). Again, assuming the funds to cover the down payment are available, Bank Med s offer appears to be the most competitive with the lowest payments. Table 3: Monthly Payments for a 750,000,000 LBP Loan for 25 Years Assuming No Grace Period Blom (B)* Blom (C)** Med BLF Audi HSBC(A or B) *** First Year LBP 4,350,000 LBP 4,917,000 LBP 3,655,000 LBP 3,755,000 LBP 5,707,000 $3,027 Year 2 to 15 LBP 4,350,000 LBP 4,917,000 LBP 3,916,000 LBP 4,122,000 LBP 5,707,000 $3,040 Year 16 to 20 LBP 4,953,000 LBP 5,270,000 LBP 4,571,000 LBP 4,800,000 N/A $3,040 Year 21 to 25 LBP 4,953,000 N/A LBP 4,571,000 LBP 4,800,000 N/A N/A *Darati ** Darati under Construction ***HSBC loan is in USD Only Blom Darati, Bank Med, and BLF offer loans with a 25 year maturity. For this term, the monthly payments of Blom (B) offer will decrease to LBP 4,350,000 and 4,953,000 for the first 15 years and last 10 years respectively. Bank Med s offer entails payments of LBP 3,665,000, LBP 3,916,000, and LBP 4,571,000 for the first year, next 14 years, and the last 10 years respectively. BLF s offer is slightly more expensive than that of Bank Med. 8

9 Bank Med and BLF offer a reasonable scenario where interest and payments increase with time in line with likely rises in borrowers salaries. Only Med and BLF banks are ready to offer loans with maturity of 30 years. 2. Grace Period It is important to note that all the offers except Blom and HSBC give the option to have a grace on period between 6 and 24 months. The grace period is on capital, meaning that the borrower would still be paying interest but he will be exempted from paying the loan principle allocation over this period. Unless the borrower is expected to face difficulties in securing the full payment (interest and principle) in the first months of the loan, it is not recommended to opt for the grace period option since throughout the grace period as it implies higher interest payments for the remaining life of the loan. Conclusion As the analysis above reveals, Bank Med s offer appears to be the most suitable arrangement and most attractive features with the lowest monthly payments in LBP for a general purpose home purchase. Bank Med and BLF are the only ones to offer loans of maturity beyond 25 years. The other offers would be attractive under some specific conditions: Blom (B) Darati, with a 0% down payment requirement, would be most convenient for a borrower who does not have cash reserves for the down payment on the house value. Blom (C) Darati Under Construction is the only offer available for a borrower planning to buy a house under construction by one of a list of builders preapproved by Blom Bank. HSBC s offer is very competitive for the time being but it bears very high risk for the future. This offer is convenient for an employee who earns his salary in USD or willing to bear exchange rate risk (LBP devaluation against USD). It also bears a risk of rise in LIBOR rate that is very low today but expected to increase in the future. Note that partial or full prepayment is allowed for 1% fee on the loan. BLF s offer has a slight disadvantage in terms of payment amount compared to Bank Med s offer but has a competitive option of prepayment with no extra charges that could be beneficial for borrowers expecting to have the ability to 9

10 partially or fully settle the loan amount prior to maturity. The current negative spread between the rates on housing loans and deposits would however disincentivize anyone from prepaying the loan and therefore the merits of such advantage are questionable from a financial standpoint for as long as this spread is maintained. 10