Brazilian banks end “super-low” interest rate era for real estate loans

RIO DE JANEIRO, BRAZIL – After a long season with banks racing to lower home loan interest rates, the cycle has now reversed. Financial institutions are raising the rates for new financing contracts, in anticipation of more difficult times for the Brazilian economy.

Brazil’s largest private banks – Santander, Bradesco, and Itaú Unibanco – have decided to increase the rates charged on home loans by between 0.5 and 1.0 percentage points, to nearly 8% per year.

The average interest rate on mortgages stood at its lowest level in the sector’s history, around 7% per year. Until a few years ago, the average was somewhere between 9% and 10%, which considerably reduced the population’s purchasing power.

Caixa Econômica Federal (the state-owned savings bank) – owner of two-thirds of the mortgage market – and Banco do Brasil are also expected to move in the same direction, but they have not yet commented on the matter.

The increase in financing interest rates will raise the installment paid by borrowers by up to approximately 9%. A R$300,000 (US$57,000) loan with a 360-month payment term under the constant amortization system (SAC) generated a monthly R$2,529.57 installment, at the 7% annual rate in force until now. Henceforth, this installment will rise to R$2,646.81 at a rate of 7.5% per year, or R$2,763.54 at a rate of 8% per year.

Expected increase

The rise in interest rates for home purchases was expected, since banks follow the cycle of the benchmark interest rate SELIC, which serves as a basis for the remuneration of savings accounts. These, in turn, are the banks’ source of funds for financing real estate.

With the drop last year in the SELIC to its lowest levels in history, banks also rushed to cut interest rates on mortgages to attract more clients. Now this trend has been reversed as the SELIC has been substantially raised by the Central Bank. Financial institutions are also monitoring future interest rates, which have plunged due to several factors that have weakened the economy, from high inflation to the uncertainties caused by national politics.

“This rise in rates is a natural market trend that was expected,” said Fitch Ratings’ senior director Claudio Gallina. “If there is a rise in the SELIC, the cost of funding for banks rises. So they have to reprice their credit operations.”

Real estate market

Real estate sales surfed the wave of low interest rates and are now expected to slow down somewhat. However, the effect should not have such a big impact for the sector, according to the president of the Brazilian Association of Real Estate Companies Luiz França. This is because interest rates will still remain below the historical average – which will help keep the market heated for longer.