By Melchor Alcántara
Special for El Inmobiliario
The debate surrounding mortgage rates in the Dominican Republic has transcended its sectoral scope and become a macroeconomic challenge. In an environment where mortgage rates hover between 14.0% and 17.5%, while bank deposit rates hover around 6.6%, financial coherence is lost, real estate sales plummet, buyers lose their ability to qualify for loans, and developers face delays. However, what is most surprising is that, simultaneously, banks are advertising car sales with rates as low as 7.75%, nearly half of what they charge for a mortgage. Can anyone explain this?
In other words, financing a vehicle is cheaper than financing a home, which, for any serious economy, is a red flag. Although banks justify high mortgage rates by arguing, "We can't lower rates due to operating costs," this argument simply doesn't hold water. Let's see why:
- The interest rate that banks pay to depositors is not high.
Financial certificates, which do pay interest, represent only a portion of their deposits. - Checking accounts—which pay no interest or minimal amounts—make up a huge proportion of the money they use for lending. This means the real cost of those funds is practically zero.
- If the effective deposit rate is calculated (including savings and checking accounts), the financial cost of banking is reasonably low, which means that the gap between what banks pay depositors and what they charge when giving loans is historically high.
- Paradoxically, for vehicles they can place billions of pesos at much lower rates, even though these are riskier loans (high default rate, accelerated depreciation of the asset and rapid loss of value of the asset given as collateral).
From analyzing these points, one conclusion is clear: They can lower mortgage rates. They just don't want to.
In developed economies, there's a tacit but fundamental rule: mortgage rates are typically 30% to 40% lower than consumer loans. This is easy to understand, as mortgage loans offer truly solid collateral, have a low historical default rate, and are stable assets that promote sustainable economic growth; unlike consumer loans, which are riskier, carry higher losses, and finance assets that quickly lose value. This logic distinguishes stable economies from vulnerable ones. But in the Dominican Republic, this order is reversed.
Why is logic upside down in the Dominican Republic?
1. The profits that consumer loans bring to banks are more lucrative.
Personal loans, credit card loans, and consumer loans in general offer flexible rates and shorter repayment terms, which increases profits from closing costs and negotiation fees inherent in these transactions. All of this generates a high turnover of funds, which benefits banks. These are products that offer immediate profitability. Mortgages, on the other hand, are long-term and require commitment. That's why they aren't a priority.
2. There is no regulation that requires maintaining a balance
Neither the Monetary Board, nor the Central Bank, nor the Superintendency of Banks establishes a technical parameter to limit the gap between mortgage and consumer loan rates. Each bank sets its own interest rate as if it were a common commercial product whose price has no impact on macroeconomic performance.
3. Lack of public policies focused on housing
Countries with more organized economies and greater awareness of the social impact of low interest rates on housing have sophisticated tools to ensure that mortgage rates remain within the economic growth range. Some of these policies are as follows:
- Cheap funding programs,
- State guarantees,
- Regulatory limits on mortgage margins,
- Banks specializing in housing.
In the Dominican Republic these factors are absent.
4. Absence of an entity to defend this key economic parameter
Mortgages are one of the most crucial instruments for economic development. However, we lack an institution to ensure that mortgage rates adhere to a first-world technical standard.
The result: Consumer credit is subsidized by market logic, while housing credit is penalized.
Who is responsible for addressing this distortion?
In the Dominican Republic, no one monitors the technical differential between consumer interest rates and mortgage rates, nor between passive and active interest rates, key parameters that in advanced economies are protected by:
- central banks
- housing policies
- specialized funds
- macroprudential regulations
Macroeconomic consequences
a) Drop in real estate sales and reservations
Families lose their ability to qualify.
b) Slowdown in the construction sector
Less employment, less demand for materials.
c) Increase in rents
When buying is impossible, renting goes up.
d) Family asset lag
Families get trapped in cycles of consumption, not accumulation.
e) Pressure on the dollar
Import credit amplifies the problem.
All these variables have an impact on the economy and the real estate market, with a brutal domino effect:
- Fewer families qualify to buy a home.
- The sales rate for new projects is reduced.
- Refunds and renegotiations are on the rise.
- This puts upward pressure on rental prices, since families who cannot afford to buy would obviously have to rent.
- The construction sector —one of the country's largest job creators— is slowing down.
- National GDP growth is plummeting.
A very important fact to consider is that a single percentage point increase in the rate translates into a 7%–10% increase in the monthly fee, which is enough to take thousands of buyers out of the game.
Technical conclusion
The Dominican financial system maintains artificially high mortgage rates without technical justification, affecting:
- access to housing
- exchange rate stability
- the accumulation capacity of the middle class
- the growth of the construction sector
- the general economic dynamics
- GDP growth
The Dominican Republic needs mortgage lending to return to rational levels—ideally between 7% and 9%—as dictated by a mature and modern economy. The banking sector has room to do so. Our existing regulations have the capacity to incentivize this change. And the country needs it so that the middle class can continue to access housing, so that construction remains active, and so that the economy maintains a solid foundation for growth. Until that happens, we will remain in a serious contradiction: a country where it is cheaper to finance what loses value than what builds wealth.
The content of this article is the sole responsibility of its author.
