Home loans account for more than a quarter of local banks’ private sector lending. This is in large part thanks to subsidized loans from Banque du Liban (BDL), Lebanon’s central bank, and loans from the Public Corporation for Housing (PCH), which are offered through local banks to lower-middle and low-income home buyers.
A surge in home loans in recent years has prompted banks to explore untapped areas in the home buyers’ market, offering loans in US dollars with attractive terms to those buying second or third homes, luxurious and expensive units, seaside or mountain chalets, and even land to build on or property abroad—none of which are covered by BDL subsidized loans or PCH loans.
Through billboard, radio, and TV ads, banks try to make a case for their home loan products, touting better terms than their competitors, including longer repayment periods, a longer grace period, more competitive interest rates, and even 0 percent interest. All banks offer nearly identical products when it comes to BDL subsidized loans or PCH loans, and their proprietary home loans are crafted within very strict guidelines from the central bank that leave them with little wiggle room to differentiate their product from their competitors. Nonetheless, banks have cleverly used that wiggle room to grow their portfolios of home loans. Home buyers would do well to educate themselves about banks’ bag of tricks and shop around for the product that best fits their needs.
A surge in home loans and incentives
In today’s property market, developers are increasingly eager to make sales, offering sizable discounts on units that dip to 20 or even 30 percent below asking price. “The volume of home loans in the market has gone up by 20 percent per annum over the past 10 years,” says Marwan S. Barakat, head of research at Bank Audi. “Today, there are $12.2 billion in housing loans in Lebanon, compared to just $4.5 billion in 2010.”
By comparison, total private-sector loans in the market today stand at $53 billion. According to 2016 figures from Bankdata, the three Lebanese banks with the largest home-loans portfolios were BLOM Bank at $1.84 billion, accounting for 16 percent of the market, Bank of Beirut at $1.52 billion, accounting for 13 percent of the market, and Bank Audi at $1.45 billion, accounting for 12 percent of the market. And it is not only Alpha banks that are looking to capture a sizable share of this lucrative market: BSL Bank, a midsize Beta bank, launched its Home Initiative Loan in February with the tagline, “Repay what you borrow and not a penny more.” The loan has an annual percentage rate (APR) of 0.65 percent—nearly zero.
“We got a call from consumer protection at BDL,” said Charbel Watfa, CFO of BSL Bank. “We were happy we got that call—it meant they were doing their job. They were curious to know how we could offer such an attractive rate. I sent them my calculations, and they were satisfied and wished us luck.” At the end of 2016, BSL’s total home loans stood at $41 million; in the seven months since the bank’s initiative was launched, their home loans portfolio has increased by $21 million.
“The home loans sector benefited a lot from the stimulus packages of the central bank, although over the last two years there has been a slight slowdown in growth in the housing loans sector,” Barakat says. To counter this dip, the central bank has raised the ceiling on the amount home buyers can borrow to purchase a property under its subsidized loans program, from LL800 million ($533,333) to LL1.2 million ($800,000), a significant hike. Nassib Ghobril, head of economic research and analysis at Byblos Bank, says that BDL is set to announce new incentives to help increase demand for home loans from expatriate Lebanese, which he notes have dropped significantly. “The incentive is said to include a 30-year mortgage at 2 percent interest and a four-year grace period,” Ghobril says. “The intention to buy property may have increased, but that has not yet translated into actual transactions—for that, you need incentives.”
The 0 percent myth
BSL Bank is technically correct when it says its loan is offered at 0 percent interest, not including fees—however, this is not to say that the bank doesn’t profit from the deal. The bank requires customers who qualify for the home loan to give it 20 percent of the value of the property being purchased, on top of the 25 percent down payment the customer already paid the seller, totalling 45 percent cash upfront. The 20 percent is returned to the customer in monthly payments over the duration of the 30-year loan period, minus the interest that the bank earns on the money from investing it. The bank could potentially lend the money out several times over that 30-year period at a much higher interest rate to recoup its costs and net a handsome profit.
But Watfa insists that what BSL Bank earns on its home loan product is barely enough to cover its costs. “In our situation, we needed to grow our market share, so we offered this loan. To be eligible for the loan, you have to put money in the bank, have an account, credit cards—in short, be a loyal BSL customer, and not just passing through,” says Watfa. He adds that BSL benefits from this home loan by building their customer base and cross-selling various other bank products.
Property prices went up so high that monthly payments couldn’t increase in the same way and still be affordable to salaried employees of limited financial means
Banque Misr Liban (BML) offers a similar facility to buyers through its Prepaid Interest Housing Loan, which requires clients to pay the interest on their loan up front in cash, instead of over the 25-year loan period as part of the client’s monthly payments. Roger Zovighian, assistant general manager and head of branches and retail at BML, says this is advantageous for the client. “The amount paid in interest is less if paid up front than if you pay it in installments over the whole period of the loan,” he says. For example, the interest paid up front on an apartment worth LL300 million would come to around 20 percent of the apartment’s value, whereas if the interest were paid over the whole period of the loan, it would come out to around 40 percent of the apartment’s value. “We also invest the prepaid amount to earn interest and pay part of that interest back to the client,” Zovighian says.
Since introducing its prepaid interest loan a year ago, BML’s total portfolio of home loans has grown to $87 million, up from $74 million last year. Both BML and BSL home loans appeal to wealthier homebuyers who are able to pay 45 percent of the total value of a property in cash; it is an opportunity for them to leverage the purchase of a larger property and save on interest.
Buyers’ market intensifies competition
Developers have had to adjust their expectations and offerings over the past few years. Since Gulf Arabs pulled out from the market, the luxury segment of the property market has seen almost no activity. “Competition is high between developers on quality of finishing, number of parking spaces assigned per unit, size and location of storage room for each unit, the quality of the material used. Developers are also providing financing facilities through tie-ins with banks and trying to make it easier for buyers to bear the costs of buying a home,” says Marwan Mikhael, head of research at BLOMINVEST Bank. “Before 2007, we didn’t have 30-year home loans; today you can get up to a 40-year loan. Property prices went up so high that monthly payments couldn’t increase in the same way and still be affordable to salaried employees of limited financial means, so we followed the US and Western countries in giving long-term loans.”
Demand today is for small units, according to Mikhael: Units measuring 70 square meters to 130 square meters sell best. The shift from luxury to utilitarian, from a supply-oriented market to a demand-driven one, began in 2011 with the start of unrest in Syria and its impact on Lebanon. Prices had been rising steadily from 2006 until 2010 by about 35 percent annually. “Real estate in 2006 was undervalued when compared to the region and other emerging markets at the time,” said Mikhael. “This was a boom time—9 percent [GDP] growth per annum—[and] the housing sector benefited because it was undervalued.”
The boom years are over now, but prices remain relatively high. “The cumulative decrease in real estate prices over five years, since 2011, has been just 20 percent,” says Bank Audi’s Barakat, adding that list or asking prices rarely go down in Lebanon. “Low leverage in the market means developers don’t rely on debt to finance their projects, but instead,count on their own financial means and are not under pressure to sell at any price. In addition, the type of demand in Lebanon is end-user demand; speculation only accounts for 20 percent of the market,” he adds. With Gulf investors out of the market, and Lebanese abroad investing less, Barakat says resident Lebanese demand is keeping the market together.
With Gulf investors out of the market, and Lebanese abroad investing less, Barakat says resident Lebanese demand is keeping the market together
Bankers’ bag of tricks
BDL protects consumers’ rights by requiring banks to disclose their APR, including all fees and insurance costs, to any potential home loan customer. But sometimes, highly suggestive and emotive language used to promote a loan in advertising campaigns can mislead. Grace periods, in particular, are a misnomer. “A grace period as advertised by banks is not really a grace period,” says Mikhael. “While you only start to pay the principal amount after the end of the grace period, you actually do make monthly payments during the grace period, but only interest payments on the principal.”
In fact, the much-touted grace period, be it for one, two, three, or four years, is a little more than a poison chalice. “People are happy when a bank gives them a grace period, but in fact, this is to the bank’s advantage, not the customer’s, since it’s a period of time during which your principal has not decreased at all, but [instead] accumulated interest that you eventually will have to pay,” says BSL’s Watfa.
The way the monthly payments are structured also has an impact on how much a customer pays each month. BDL rules require that monthly loan repayments not exceed one third of a borrower’s total income. Some banks allow customers to make a one-time balloon payment at the end of the year to lower the outstanding loan amount and further reduce the interest. “Customers should ask about the monthly payments more than the interest. The monthly payment is divided between interest payment and principal payment. If a bank overloads the monthly payments with interest, the principal remains high, and a customer ends up paying more in interest over the whole repayment period,” says Mikhael.
Two different banks could have the same interest rate for the same loan amount, and the same repayment period, but their monthly payments would still differ markedly. “If a customer asks how the monthly payment is structured, a bank is obliged to tell them,” says Byblos Bank’s Ghobril. Mikhael says that banks generally do not tell customers how their monthly payment is structured, how much of it is interest, and how much is principal, if they do not ask. “It’s up to individual banks to decide how they structure their loans—BDL doesn’t insist banks tell customers how much of their monthly payment comprises interest and how much is principal,” Mikhael says.
Selling the loan
A loan is still a product that comes with a price tag and the unassailable consumer right to ask questions. Advertising is designed to make any product attractive and compelling, and home loans are no exception. “While advertising may get customers through the door, once they’re in, BDL imposes strict guidelines on banks that require them to disclose how interest rates are calculated to their clients. Banks have to be very transparent,” says Ghobril.
Local banks are intensively marketing their products to both resident and expatriate Lebanese, especially banks that are looking to expand their market share. “We do a lot of marketing for our products. We had a huge campaign for expatriate housing loans, and it has been a great success,” says Georgina Dinar, head of group consumer loans at Byblos Bank. “The idea is to assure the Lebanese living abroad [so that they] come home and invest in their country. Our team in Abu Dhabi and Dubai held a seminar for expatriates to promote our loan products.” The bank also adds a few sweeteners to reel in potential customers, including a special account for expatriates, cash transfers at low rates, and a pre-approved credit card with a $5,000 limit and no basic annual fee for the first year.
Interest in the land loan has been very good. It’s very important for the Lebanese abroad to buy a home or buy land on which to build a home in their native villages
Three years ago, Byblos Bank also introduced the Expatriate Land Loan as part of its expatriate package. “Interest in the land loan has been very good. It’s very important for the Lebanese abroad to buy a home or buy land on which to build a home in their native villages,” Dinar says. To sweeten the deal further, for the first two years of the loan period, Byblos’ rate is cost of funds plus 2.8 percent instead of the standard 3 percent.
Bank Audi runs two or three promotional campaigns for their home loan products each year, according to Grace Eid, head of retail banking Lebanon at Bank Audi. “Over seven years, we have had road shows aimed at expatriate Lebanese. We have gone to Latin America and sent people to the Gulf. Most Lebanese in the Gulf would love to own a home in Lebanon. We see less interest from the US, but we do see interest from Latin America and from Africa—the Lebanese there have a nostalgic longing for owning a home in Lebanon,” Eid says.
Audi offers 0 percent interest credit cards, special accounts, low cash-transfer rates, and a free robot vacuum cleaner to each home loan customer. In addition, the bank also tries to build a strong bond of trust with consumers through what are framed as public-service TV ads that inform the public of their rights when dealing with banks. “As the consumer is not an expert, three years ago we introduced “Banking Tips,” a video series on TV, which includes advice on real-estate expert fees, home insurance, and bank-file fees,” Eid says. The series was a clever way to promote a feeling of trust between consumers and the bank. It has since been replicated by at least one other local bank.
Not all banks, however, promote their housing loans intensively. BML’s Zovighian says, “We don’t advertise our housing loan products; we only promote it through our brochures that we have at our branches. We haven’t found a way to market it properly to a wider audience yet, but we can’t market the [prepaid interest housing] loan as a ‘0 percent’ interest loan because it is not.”
Types of loans
The market has many options for first time home buyers: For lower-income homebuyers, there are loans from the Public Corporation for Housing (PCH); at the middle to lower-middle end, there is the BDL subsidized loan and Habitat Bank loan; and then there are the banks’ own custom home loans that meet the needs of second home buyers.
The Banque de L’Habitat, or Habitat Bank, offers home loans at attractive rates, and its customers are exempt from stamp duty and mortgage fees, but the loan amount is limited to LL800 million ($533,333). The bank currently has a 6 percent market share in the home loans market, according to Bankdata. “BDL owns 20 percent of the Habitat Bank, while commercial banks own 80 percent. BDL asked the Habitat Bank to lower its rate to 3 percent with the stimulus package, [and] this took clients away from commercial banks,” says Ghobril.
The PCH offers home loans that can finance 100 percent of the value of the purchased home with no down payment required, but the value of the loan is limited to just LL270 million ($180,000). The applicant’s monthly salary also determines the size of apartment one can purchase under this loan. “The PCH is the most advantageous: The loan period can extend for up to 30 years, but in the first 15 years you only pay off the principal, [and] the PCH pays the interest for you. After 15 years, your home is fully paid for. Over the following 15 years, you start paying back the interest the PCH paid on your behalf to the bank,” Mikhael says.
For higher-income people looking to borrow larger amounts to finance a property purchase, banks offer custom loans. Byblos Bank, for example, offers a US dollar loan with no upper limit on the amount borrowed, at rates that top 9.5 percent for a 10-year loan to finance the purchase of a piece of land. “Our product allows us to address the needs of niche customers, those who wish to buy a second home or a chalet—even those who wish to buy a piece of land, we cater to them,” Dinar says. “It’s not a highly profitable loan product, but our aim is to serve our customers and to grow our customer base.” She adds that if a customer wishes to build on the land, the bank can extend a second loan to cover construction costs with the land mortgaged to the bank as collateral.
Structuring the loan and transparency
Each bank structures monthly loan repayments differently, through its own internal financial engineering. BDL leaves such decisions up to local banks to determine. “The monthly payment is reviewed each year based on the new interest [rate],” says Dinar. “From a transparency perspective, we provide our customers with a key-facts statement from the start that lists all the fees and costs of the loan and interest payments distributed throughout the year. The structure of monthly payments—[the] percentage of the payment that is interest and [the] percentage that is payment of principal—is standard for all banks in Lebanon,” Dinar says.
Two different banks could have the same interest rate for the same loan amount and the same repayment period, but their monthly payments would still differ markedly
Bank Audi’s Eid says that banks have to tell clients about their APR, as well as life-insurance fees. “Banking services are standard. We differentiate ourselves from other banks by putting the customer at the center of our offering. People have different needs, and we have to provide financial solutions for our customers. We are not driven by volumes alone, but rather offer the right product for the right customer,” Eid says. Personal bankers learn about applicants, so they know to point them to the product that best suits their needs, she says, examining their repayment capacity and total income. Eid adds that the market has become more regulated over the past three years.
While banks continue to promote their home loan products as the best deal for the consumer, they will be held to a high standard of transparency and fair dealing by the central bank. This, however, does not replace the consumer’s responsibility to ask questions and to shop around for the home loan that best fits their needs and their financial means.