With effect from June 1st, 2020, anyone taking a bank loan meant for buying a residential home or land will be required to at least have 15% of the stake, new guidelines from Bank of Uganda (BOU) have indicated.
In the circular dated June1st,2020 that he sent to all Chief Executive Officers of Commercial Banks, Credit Institutions and Microfinance-Deposit taking institutions, Dr Tumubweine Twinemanzi, the Executive Director Supervision at BOU said that BOU had set a maximum limit of 85% on Loan to Value Ratio (LTVR) on residential mortgages and land purchase.
Dr Twinemanzi says setting the maximum LVTR of 85% has been done due to the negative impact of COVI-19 pandemic which may in the near future drain the sector and increase its vulnerability.
“Current projections and market intelligence indicate the COVID-19 pandemic might in the near future potentially lead to a double digit decline in real estate evaluation,” reads part of the circular.
Dr Twinemanzi adds that this would increase the risk of downward pressure on banking asset quality, reduced collateral evaluations increased expected losses and invariably breaches of LTVR.
“These risks are realized in combination with a prolonged period of dislocation in the economy, the banking sector would be negatively affected and vulnerability of the sector increased,” the circular adds
The Bank of America (BOA) advises borrowers that the LTVR of 80% and lower is better since it helps the borrower to avoid paying for private mortgage insurance and also allow him/her to qualify for a wide range of loans
BOA also warns that high LVTR pause a high risk to the lender since; “The lender has to lend more money on the purchase, if home value declines, the lender lose more money and secondly, buyers who invest more of their money upfront are less likely to walk away from the home. When buyers have high stakes in the loan, they are less likely to stop making payments.”