Housing finance

The Thai housing industry, especially for developers of middle- and lower-income homes, has remained buoyant despite the global economic crisis.

Large middle-income housing developers such as Preuksa Real Estate, Property Perfect and LPN Development are approaching near record sales in 2009.

Much of their success can be attributed to Thailand's well-developed housing-finance market, especially for lower- and lower-middle-income buyers.

Ballobh Kritayanavaj, senior vice president of the Government Housing Bank (GH Bank) and head of its Research and Information Services Department, said more than 90 per cent of Thai home-buyers borrowed money from financial institutions to purchase their homes.

"For most individuals, home loans are usually the largest amount they will ever borrow in their lives," he said.

Financial institutions in this country usually allow home-buyers to borrow an amount equal to a multiple of their monthly incomes. "Mortgage payments normally should not exceed 35 per cent of monthly incomes," he said.

However, most commercial banks do not provide mortgages of less than Bt1 million.

"GH Bank, a government-owned specialised financial institution, fills that void by providing home loans to middle- and lower-income Thais, with average loans of about Bt700,000," he said.

At the same time, most financial institutions do not have ceilings on home loans. "They are normally concerned with whether borrowers can make the monthly principal and interest payments. But in general, no home loan can exceed the home's appraisal value," he said.

However, Ballobh said all Thai banks had maximum loan-to-value ratios for mortgages. In general, they will not allow loans to exceed 70-90 per cent of the purchase price or appraised value.

In Thailand, interest rates on most home loans are fixed for three to five years and then adjusted to market rates for additional periods.

He said that because mortgages were usually for large amounts, they were usually long-term loans that were amortised over many years. Thai financial institutions usually provide home loans repayable over 20-30 years. Monthly mortgage payments include both principal and interest, which are amortised over the loan term. Under the amortisation process, interest payments constitute a higher portion of loan payments during the early years.

Monthly mortgage payments depend on three factors: the loan amount, the interest rate and the term of the loan. Thai financial institutions issue fixed- and floating-rate home mortgages, he said.

Fixed-rate loans have the interest rates fixed over a contractual period. Interest payments can either be fixed at the same interest rate for a contractual period (such as 6 per cent for three years) or they can change - but are still fixed at the outset - over the contractual period (for example: 3 per cent in years one and two; 6 per cent in year three).

Floating-rate loans feature interest rates that may constantly change over the term of the loan.

The rate is usually dependent on money-market rate adjustments or changes in a determined reference rate.

"In computing monthly payments for floating-rate loans, most Thai financial institutions also include a reserve that will help to mitigate the 'payment shock' from interest-rate increases and consequent higher mortgage payments," Ballobh said.

For example, in computing a buyer's monthly payments on a mortgage with a nominal 6.5-per-cent interest rate, the bank may add a 1-2-per-cent "reserve". The buyer's monthly payments will then actually reflect interest rates equalling 7.5 or 8.5 per cent.

Most financial institutions now use "credit scoring" models and customer information from the National Credit Bureau to improve their loan underwriting and approval efficiency.

As a consequence, normal loan-approval processes are now much quicker, taking one to two weeks, while non-performing loans have fallen in the past several years to as low as 2 per cent of total loans.

"Several Thai banks have even implemented computerised pre-approval systems that approve consumer loans within a few minutes after a borrower's profile is entered into the system," Ballobh said.