Turkish Banks Are Taking Losses on Mortgages After Rate Pressure

  • Average rate charged on mortgage loans is below deposit costs
  • President Erdogan began calling for mortgage cuts in August

Turkey’s banks are issuing mortgages at a loss as the government prioritizes revival of the housing market to spur growth.

President Recep Tayyip Erdogan, whose opposition to high interest rates is well known, began calling on commercial banks in August last year to slash their rates on mortgage loans. One after another, the banks obliged, cutting rates to below 1 percent monthly. The problem for the lenders is that since then, their borrowing costs have risen considerably, a move they’re not passing on to home buyers.

In an effort to slow the depreciation of the lira and tame inflation that surged to a nearly nine-year high in March, the central bank has boosted its average cost of funding by about 350 basis points since Erdogan first made his mortgage call. That increase has driven the rate the banks have to pay for three-month deposits, a key source of funding, to 11.30 percent, or about 19 basis points higher than the average rate they charge on mortgages.

"Trying to keep monthly rates below the psychological level of 1 percent has led to a different pricing in mortgage loans, which is not very profitable for banks at the current funding costs,” said Cagdas Dogan, a banking analyst at BGC Partners Inc. in Istanbul. “The interest rate gap between mortgage loans and other consumer and commercial products is indeed at an all-time high.”

Housing loans constituted nearly 10 percent of total loans in Turkey’s banking system as of February, according to official data. The average rate of 11.11 percent for mortgages compares with a rate of 16.66 percent for cash loans, 15.51 percent for commercial loans and 15.42 percent for vehicle loans, according to data compiled by Bloomberg.

Banks use mortgages as a “hook product to be able to get commissions and sell other products,” said Bulent Sengonul, an analyst at Is Yatirim Menkul Degerler. “To protect their margins, private banks have recently increased their interest rates on mortgage loans slightly, but state banks are very competitive and still keep interest rates around 0.80 percent per month, which I think is not also very sustainable."