Surging mortgage rates causing financial havoc for families across Cayman

Cayman Islands homeowners and renters are facing a huge cost-of-living shock as the impact of rising interest rates hits home.

Some people are struggling to hold on to their homes amid a rapid rise in mortgage rates that has seen monthly repayments double in some cases. And even high-income families are finding it hard to make ends meet as costs rise out of any proportion with salary.

The average interest rates on mortgages have increased from around 4% to up to 9% in the space of two years.

That means someone with a $200,000 loan for 20 years, would have seen their monthly repayment costs increase from just over $1,200 to around $1,800. The impact is similar for those renting homes, with landlords largely passing on increases to tenants.

The cost of home insurance has also risen dramatically, meaning many families have seen their monthly outgoings double.

Georgie Loxton, a financial advisor with Liberty Wealth Partners, said the impact was being felt in all sectors of society.

“We have clients on six-figure salaries and at the end of the month there is nothing left,” she said.

“We look at their expenses and there is nothing to cut. You have got to eat, you have to pay your mortgage, your home insurance, your school fees. It has got to the point where there is little room for manoeuvre.”

While politicians have raised concerns about possible foreclosures, figures from the government Lands and Survey Department and from the banks themselves, suggest this has yet to materialise in a meaningful way.

Uche Obi, director of Lands and Survey, said there had been six property transfers so far this year as a result of homeowners defaulting on mortgages, compared with 12 for the entire year in 2022. He said this mirrored the trend in the United States, where rapidly rising interest rates have yet to result in an increase in home repossessions.

Simon Cawdery, the host of Radio Cayman’s MoneySense show and a Cayman Compass columnist, cautions that there may be some time lag between cause and effect in this area.

Once people burn through their savings and exhaust resources to meet monthly repayments he believes there is likely to be an increase in foreclosures.

“Lots of people have been shocked by the speed and size of the interest rate increases but they have had some savings that have cushioned them in the short term. But that cushioning won’t last for long,” Cawdery warned.

Rick Riyat, head of valuations for BCQS International, said the industry was already starting to see an increase in valuation instructions from banks, both for collections and for renegotiated mortgages.

“The unfortunate reality is that we are likely to see an increase in foreclosure given the extent to which monthly repayments have increased,” he said.

Insurance and construction increases

He added that the cost of home insurance was going up at a similarly unprecedented rate, with major insurers seeing the Caribbean as a high-risk jurisdiction following recent hurricane seasons. In some cases, insurance costs have gone up 40-50%.

In addition, BCQS, in its 2022-2023 market trends report, calculated that construction costs have gone up 21% since COVID, which also has an impact on insurance premiums which are calculated based on replacement costs.

“Premiums have increased significantly because insurers are looking to move their business to lower risk areas,” said Riyat.

“We are even seeing cases where people can’t get full coverage for their properties. That is something that could be an emerging problem if the trend continues.”

Household budgets

Loxton said the interest rates and home insurance hikes were having a massive impact on family budgets.

In most cases, she said, people had not seen pay rises of anything like the same magnitude.

“If you have a large mortgage and two or three kids you can be struggling to make ends meet on a very high salary.”

She recommends people do ask for pay rises where possible or get creative about how to increase their income, for example by renting out a spare room.

“When there is nothing to cut on the expenses side, you have to look at income,” she added.

For those that have not seen mortgage repayments increase in line with interest rates, she warns the shock could be coming later down the line in the form of a massive balloon payment at the end of the mortgage period.

Equally those who negotiated temporary fixed-rate mortgages – usually for a period of two-to-three years – could be about to revert to a variable rate, meaning their repayment costs could almost double overnight.

Consequences

The consequences of those increases remain to be seen. Loxton believes foreclosures are likely to increase as people continue to struggle. She said some people are choosing to leave the island for less-costly jurisdictions, while recruitment has become tougher amid rising costs.

In the real estate industry, there has been a marked slowdown in sales.

Riyat, of BCQS, said sellers will likely have to either accept lower prices than listed or wait for longer to find a buyer.

Anyone looking for a home is likely to be more circumspect, given the increased cost of obtaining a mortgage. That could impact people who agreed to buy at pre-construction prices on a variety of new developments that are about to complete.

Those buyers, many of whom will have negotiated bank financing at a much lower rate, may find they now cannot afford the purchase.

Kim Lund, of RE/MAX, accepted that was a possibility but said there was no evidence of it happening on a large scale as yet. He said most of the new developments, particularly the large condo projects on Seven Mile Beach, were around 80% sold already.

He said the market had slowed down for a number of reasons, not just interest rate hikes, characterising the dip as an inevitable ‘pause for breath’ following a period of rampant activity.

Political concern

While the challenges are obvious, the solutions are not.

Premier Wayne Panton has called for banks to delay passing on the interest rate hikes – set by the Federal Reserve in the US – to Cayman consumers by 60 days. 

While that wouldn’t ultimately make a difference to the repayment costs, Panton argued it would give residents time to adjust their budgets. 

In a statement last month, he said,  “My colleagues and I are continually hearing from constituents that their mortgage payments have increased to an unsustainable degree – in some cases up to $1,000 or more per month.

“This is a huge increase that might negatively impact any family in these times. We must guard against Caymanian homeowners potentially losing their homes due to the inability to meet increased interest charges.”

West Bay West MP McKeeva Bush, supported by former Finance Minister Chris Saunders, has brought a motion to Parliament, to demand banks reduce interest rates immediately and commit to not increasing them for 24 months.

Speaking on Radio Cayman’s ‘For the Record’ show, he said, “People [are] having a very difficult time. And the very poorest in Cayman. They can’t pay a loan now. They [are] coming to MPs asking for assistance to help pay insurance, to help pay loans… People are having it tough. Government now has to do something. It can’t be just talk.”

Capping interest rates ‘unworkable’

Cawdery told the Compass that government had identified a serious problem, but proposed an unworkable solution.

He said capping interest rates would likely cause more problems than it solved, as it would ironically help the well-off more than the poorest and was practically unworkable in a nation that does not have its own currency.

The Cayman dollar is pegged to the US dollar and retail banks rely on borrowing huge amounts of US dollars in order to lend money in Cayman. Asking them not to pass on increases in the cost of borrowing to its customers is not practical or advisable, he said.

In the worst-case scenario, it could cause a bank collapse here in Cayman or force banks to stop lending altogether.

“If they think people are hurting and can’t afford to buy groceries or make mortgage repayments, that is a reasonable perspective, but capping interest rates doesn’t solve that problem,” he said.

Cawdery added that taxing bank profits (if they are deemed based on research to be excessive), as the UK has done, in order to increase cash subsidies to those that are most severely impacted, would be a more workable strategy.

Bush’s motion also calls for the establishment of an interest-rate-setting body in Cayman.

However, this does not appear to be viable either.

Cawdery said Cayman bank borrowing costs are set in relation to the US prime rate, which is always 3% above the Federal Reserve Rate.

“When the Fed raises interest rates, Cayman mortgage rates have to go up,” he said.

“Cayman banks have to borrow in US dollars to fund themselves so they have to pass on the costs of higher borrowing to customers.  In very simple economic terms, it is absolutely impossible for a country to set its own interest rates if it has a pegged currency.  The only way such a scheme could work is if the Cayman dollar floated against the US dollar.”

End in sight?

Both Cawdery and Loxton believe the end is in sight with interest rates likely to plateau and begin to decrease over the next 18 months.

Loxton said projections were for a 2% reduction by the end of 2024. The decrease could be quicker and steeper if there is a recession in the US, says Cawdery, but that would bring a whole new set of problems for Cayman, including increased unemployment.

He cautioned that no one should expect interest rates to return to what they were three years ago, and that mortgage rates and monthly repayments were likely to stabilise in the mid-range.