New real estate credit category. Is it a good deal?
Guilherme Zauli, attorney at Tortoro, Madureira & Ragazzi
The reduction in real estate operation costs in Brazil was Caixa Econômica Federal’s main promise with the recently introduced new credit category. Launched as a revolution to put more heat into the market, the initiative will link the adjustment of real estate contracts to the inflation rate (IPCA), replacing the Reference Rate (RR).
At first, the new feature may seem strange as it raises doubts about whether or not it is possible to reduce costs by replacing a zero restatement rate with another, currently accumulated in 3.22% (last 12 months).
However, the explanation is quite simple!
By associating the restatement of prices to IPCA, the financial institution is safeguarded from the possibility of loss resulting from any currency devaluation, thus ensuring full payment of the amount made available with the increased interest rate agreed under the contract.
Therefore, this new situation offers no risk of receiving amounts lower than those released, which allows for lower interest rates.
As for new contracts, considering that the RR is zero, the interest rate will not change until such contracts are fully complied with, regardless of possible fluctuations related to inflation. This means that there is a chance of loss to financial institutions, should the IPCA reach high levels.
It is worth mentioning that the time period for real estate financing, as a rule, exceeds twenty years. During this period, four different federal governments may be elected, giving rise to new economic policies that, consequently, have a direct influence (positive or negative) on inflation.
Considering the current economic climate, the new condition proposed by Caixa, is, in fact, more advantageous for consumers, as it allows for interest rates between 6.17% and 8.17% per year, in contrast to the 8.33% and 8.99% rates in force. However, this measure requires caution, as shown by the restatement rate (RR and IPCA) in the last 10 years.
While the RR reached the cap amount of 2.01% per year (2016), the IPCA reached 10.67% per year (2015). In addition, from 2009 to 2019, the RR reached 0.75% per year, on average, while the IPCA reached 5.61% per year, on average.
Although the Focus Report, recently released by the Central Bank, shows that inflation is expected to remain below 4% over the next three years, past events indicate that the chances of this condition remaining stable are very unlikely.
Considering the average interest rate shown by Caixa (2.95% and 4.95% per year), the inflation rate should not exceed 5.39% for consumers to benefit from the new credit category. Otherwise, the monthly installment cost will exceed the previously existing figures.
There is the option of comparing this new form of housing credit adjustment with investments in IPCA Treasury Notes. The investors contribute capital in a set of fixed income notes that pays annual interest plus the variation of the country’s official inflation. The difference for real estate contracts is that in the event of a positive scenario, instead of making profit, consumers will benefit from paying lower interest rates than usual.
It is worth noting that this possibility does not constitute any subsidy by the Government for home ownership, since the business risks remain with the borrower. Objectively, this alternative encourages credit with mortgage guarantee, which currently represents only 3% of the GDP, according to the Central Bank. This is a minor figure if compared to developed countries, such as Japan (33%), Germany (51%) and Australia (82%).
The measure proposed by Caixa Econômica Federal helps individuals with extra income who wish to speculate in the real estate market. In the event of high inflation, they will be able to invest funds beyond expectations, in order to allow them to keep their contracts in force.
For most people with no financial backup and with the intention of buying property through real estate financing, choosing the previous category is wiser, since the interest rates will not be affected in the event of currency devaluation.
To conclude, in practical terms, a new contracting method has been made available to citizens, which depends on a more volatile set of conditions than the usual. This may result in better conditions or lead to loss, all depending on the economy.