Because of the high interest rates (currently the monthly mortgage rates are about 1.3 percent for long term loans), the mortgage loan terms have been very short in Turkey. While loan term for most of the developed countries is typically between 15 and 30 years, in Turkey most people get a home loan with a maturity of 5 to 10 years. Currently, 50 percent of the new loans have their original maturity from 5 to 10 years, about 22 percent of the new loans have a maturity of 3 to 5 years, and about 20 percent of the new loans have maturities between 10 and 15 years. None of the rest of the loan terms (i.e., less than 1 year, 1 to 3 years, 15 to 20 years and 20 30 years) has a share of more than 5 percent in the new loans. So if we assume that the loans that are less than 5 years are very short term loans, very short term loans make about 30 percent of the all new loans.
The length of the loan term is mainly determined by the interest rates. A look at the historical data also shows this very clearly. For example, in the summer of 2006, Turkey, along with other emerging countries, went through a short crisis that caused the interest rates rise sharply in a few weeks of time. During this time we also see the demand towards 5 to 10 year loans decreased substantially and only about 25% of the new loans were issued with a maturity of 5 to 10 years in September October 2006 period.
During this time of increased rates, we also see that the share of the loans with maturities 3 to 5 years jumped from 20 percent to about 60 percent, again showing that interest rates are determining the loan terms significantly.
How did the new mortgage law affect the loan terms?
On March 2007, the first ever mortgage law of Turkey was approved. This law provided some tax advantages to the borrowers, gave some rights to banks to secure their credits when borrowers default, issued some penalty fees to borrowers if they want to pay back the fixed rate mortgages before the due date, and prepared the foundations of the secondary mortgage law, which is expected to operate early 2008.
After six months the law passed, we start to see some positive effects of the law on the mortgage market. Several lending institutions in addition to investment and participation banks were founded to operate in the market, banks started to offer new mortgage instruments, and started to offer loans with longer maturities.
To quantify the effect of the new mortgage law on the mortgage loan terms, we estimated a Vector Autoregressive (VAR) model using three endogenous variables: Share of very short term loans (1 to 5 years) in all new mortgages, share of long term mortgages (5 years +) in new loans and long run interest rate. We also used several dummy variables for certain large unexpected shocks and a dummy variable to measure the impact of the new mortgage law on the loan term. Our estimations showed that:
1)One percent increase in the annual interest rate causes about 10 percent increase in the share of very short term mortgages and 10 percent decrease in the share of longer term mortgages. This is consistent with what we noted earlier. One reason the mortgages do not usually extend more than 10 years is that interest rates are high in Turkey and if assume that in early 2008 mortgage rates decrease to 1.2 percent (about 0.10 percent less than the current ones), the share of the very short term mortgages will decrease to about 18 percent from its 30 percent level.
2)We also found that new mortgage law had a statistically significant impact on the loan term. Based on our model, we estimate that the mortgage law caused a decrease of 6 percent in the share of the very short term loans. In addition to the 6 percent direct impact on the loan term, we also anticipate that the new mortgage law will have indirect effect on the loan term through decreased interest rates very soon, especially, after the second mortgage market starts to operate in early 2008.
In summary, we found that high interest rates have been the primary cause of the large share of short term loans in Turkey. But with the help of decreasing interest rates and the new mortgage law, we expect that the share of short term new loans will decrease to less than 20 percent from its current 30 percent level in 2008.
The length of the loan term is mainly determined by the interest rates. A look at the historical data also shows this very clearly. For example, in the summer of 2006, Turkey, along with other emerging countries, went through a short crisis that caused the interest rates rise sharply in a few weeks of time. During this time we also see the demand towards 5 to 10 year loans decreased substantially and only about 25% of the new loans were issued with a maturity of 5 to 10 years in September October 2006 period.
During this time of increased rates, we also see that the share of the loans with maturities 3 to 5 years jumped from 20 percent to about 60 percent, again showing that interest rates are determining the loan terms significantly.
How did the new mortgage law affect the loan terms?
On March 2007, the first ever mortgage law of Turkey was approved. This law provided some tax advantages to the borrowers, gave some rights to banks to secure their credits when borrowers default, issued some penalty fees to borrowers if they want to pay back the fixed rate mortgages before the due date, and prepared the foundations of the secondary mortgage law, which is expected to operate early 2008.
After six months the law passed, we start to see some positive effects of the law on the mortgage market. Several lending institutions in addition to investment and participation banks were founded to operate in the market, banks started to offer new mortgage instruments, and started to offer loans with longer maturities.
To quantify the effect of the new mortgage law on the mortgage loan terms, we estimated a Vector Autoregressive (VAR) model using three endogenous variables: Share of very short term loans (1 to 5 years) in all new mortgages, share of long term mortgages (5 years +) in new loans and long run interest rate. We also used several dummy variables for certain large unexpected shocks and a dummy variable to measure the impact of the new mortgage law on the loan term. Our estimations showed that:
1)One percent increase in the annual interest rate causes about 10 percent increase in the share of very short term mortgages and 10 percent decrease in the share of longer term mortgages. This is consistent with what we noted earlier. One reason the mortgages do not usually extend more than 10 years is that interest rates are high in Turkey and if assume that in early 2008 mortgage rates decrease to 1.2 percent (about 0.10 percent less than the current ones), the share of the very short term mortgages will decrease to about 18 percent from its 30 percent level.
2)We also found that new mortgage law had a statistically significant impact on the loan term. Based on our model, we estimate that the mortgage law caused a decrease of 6 percent in the share of the very short term loans. In addition to the 6 percent direct impact on the loan term, we also anticipate that the new mortgage law will have indirect effect on the loan term through decreased interest rates very soon, especially, after the second mortgage market starts to operate in early 2008.
In summary, we found that high interest rates have been the primary cause of the large share of short term loans in Turkey. But with the help of decreasing interest rates and the new mortgage law, we expect that the share of short term new loans will decrease to less than 20 percent from its current 30 percent level in 2008.
SHARE
