Mortgage - Sri Lanka
Demand for houses in Sri Lanka is increasing and so is for mortgage loans:
Sri Lanka has a population of 21.35 million with the urban share being 3.87 million. It is expected that this urban share will grow by 3-4% annually. With increased urbanization and high population density in certain districts, the country is facing higher demand for houses and thereby housing finance. Sri Lanka’s housing finance sector is currently only 6.8% of its GDP. The mortgage lending market has shown growth rates of 10-20% in the past few years and while the country has a system of directed credit with a highly segmented market, it is shifting toward an integrated, market driven housing finance system. The housing finance market is segmented between private commercial banks and state-owned banks while other financial institutions too contribute in a small measure. Private commercial banks have a sway over the mortgage market share. What is significant about the country is that microfinance institutions too offer mortgage finance.
Housing finance in the country is often offered as long-term, fixed-rate mortgages. Some private banks are also offering adjustable rate loans. The State Mortgage & Investment Bank (SMIB) and National Savings Bank (NSB) offer 10-year fixed rate loans, while HDFC Bank of Sri Lanka offers fixed rate loans of 10-year duration. As a thumb rule, for low- to middle-income borrowers, banks offer a maximum of 40% of the debt service to income ratio, and 60% for higher income borrowers.
The government is involved mostly the extent of facilitating a customer obtain a loan unlike in some countries where they act as a direct provider of housing finance. Thus, the private sector has emerged as the major funding provider for housing finance development for middle- to high-income groups, while the government and microfinance institutions cater to the lower income groups.
Sri Lanka has been seeing increased demand for housing loans. Some estimates show that the housing finance market has grown at a compound rate with the escalation of per capita income and changing patterns of consumption and saving habits. Some studies indicate that declining interest rates over the past years have encouraged investments in properties rather than in low income yielding government securities and term deposits. Similarly, rises in income in the private sector has made housing more affordable. There are tax benefits for borrowers. Lastly, Sri Lankan migrants are investing in real estate in a big way as an alternative means of investment.
While state-owned institutions do not have a major role in the housing finance market in the country, housing development strategies are mainly initiated through these institutions. The government has a major role in creating affordable housing for the low and middle-income earning groups. The policy includes subsidized housing loans, participatory housing schemes for lowincome groups and apartment complexes in urban areas for middle income groups.
NDB Housing Bank, which came into existence in 2001, is a specialized housing finance institution in the private sector. It is a small entity. There are also some microfinance institutions, which are now offering housing loans to their members as a part of an attempt to improve the living conditions of the poor. The processing of loans by these institutions is less cumbersome when compared with that of traditional housing finance. The loans are available on a group guarantee.
Since the debt market in the country is not yet adequately developed, access to longterm funds for housing finance still poses difficulties. Most banks use short-term funds from savings and current accounts and deploy these funds to disburse long term housing loans, thereby creating an asset-liability mismatch. Although there are no specific regulatory provisions, the Central Bank of Sri Lanka monitors the asset liability mismatch of banks in order to ensure their liquidity.
A majority of home loan products offered by the funding institutions in the country are standardized in nature because the demands for loan products are almost uniform. Some players tried to be different like one institution offering a l oan package that includes building materials at a discounted price. But the response has not been encouraging. Likewise, the National Savings Bank offered loans for improvement of living conditions.
Loans can be availed of either on fixed or floating rates of interest. Most of the institutions have variable interest rates on housing loans. The interest rate is not fixed during the tenure of the loan. Instead, it is benchmarked against a certain index. The interest rate on floating rate mortgages may be re-set at predetermined intervals so that the interest component either goes up or down depending on the movements of the benchmark rate.
Sri Lanka is one among few countries where foreigners can freely buy properties, but they would be required to pay the land tax for foreigners, which is at 100% of the property value. They can also lease the land for 99 years, bringing the tax down to 7%. All property transactions are done in cash, in rupee. Sri Lanka has a stamp duty system of Lankan Rs 3000 for the first Lankan Rs 100,000 of the price of the property and Lankan Rs 4000 for each additional Lankan Rs 100,000.
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