Tuesday, February 26, 2008

Panamanian law gets you financing at 2% to 3% interest rates until 2008, or later ...

Banks granting residential mortgages for new residences below US$62,500 receive a negotiable tax credit equivalent to interest reduced in 2 to 4 points below the prevailing rate (see http://mypanamalawyer.blogspot.com/2006/10/buying-your-real-estate-in-panama.html).

This has made financing the construction of houses an attractive business for banks, who after earning the tax credit can assign or transfer it to another company which has to pay a lot of taxes, but at a discount. The benefit stems from a little-known Panamanian law that gets you financing at 2% to 3% interest rates. The law expires this year 2008. http://mensual.prensa.com/mensual/contenido/2005/01/09/hoy/negocios/102717.html

For the buyer, this translates into having to repay a mortage loan at interest rates 3.2% to 4% less than what the government considers as the "Reference Rate", under Law 65 of October 29, 2003 , as long as the home is the main residence of the borrower and its purchase value does not exceed US$62,500.

What is more, if the home has a purchase value below US$16,000, the final interest rate to the borrower can be of 2%. http://www.martesfinanciero.com/history/2005/07/19/columnas/nacional_3.html

For example, the government Superintendencia sets the Reference Rate (TRM) at 8.25% http://www.pa-digital.com.pa/archive/11122003/finance01_slim.html A bank would get a 4% credit rate for financing the purchase ofa US$62,000 home, so the borrower would repay at a 4.25% rate. For a US$24,000 home, the bank gets a 5% credit, so the borower gets a 3.25% rate loan.

With the current TRM at 6.5% under Memo CFL 3-85 2-2008 you can use this formula to calculate the final loan rate:

TRM - Bank Tax Credit points = Final Loan Rate

This means that the law does NOT provide benefits if:
1) The home was purchased for more than US$62,500 (this may get you a 700 sq. foot apartment or studio in the banking area, or a 2 bedroom house in a working-class commuter town),
2) The borrower expects to buy the property under a corporation,
3) The borrower already has more than 1 home under his/her own name.
4) The borrower is a foreigner buying a home to apply for a Solvency Visa (which requires an US$80,000 home)

Developers are recommending to increase the cap for benefits to homes up to US$85,000, since the US$62,500 limit was set under the first preferential interest rate law 3 of 1985. This benefit is regularly renewed thanks to the construction lobby, although many developers and real estate agent are expected to push buyers into signing the dotted line with the story that interest rates will go up.

If anybody misses the 2008 deadline, it is a good thing to know that the 5-year laws have been renewed like clockwork under Laws 3/85, 11/90, 5/94, 28/95, 30/99, 50/99 and 65/2003.

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