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Housing Finance Market Overview
In Chile, mortgage loans are available to homebuyers mainly from banks. In 2007, they provided more than 85 per cent of the total amount of residential mortgage loans in Chile. The bulk of the remaining mortgages are originated by so called mortgage administrators which, typically, have been created by life insurance companies. In 2007, the largest mortgage lender was the state-owned Banco Estado. The Chilean housing finance market has been growing considerably in the last years. The growth in mortgage debt outstanding has accelerated from 2004 on in absolute as well as relative terms. The ratio of mortgage debt outstanding to GDP increased from 11.5 per cent in 2001 to 18.5 per cent in 2008.
The Market from the Perspective of the Demand Side
In Chile, mainly three products are used for housing finance by borrowers: Letras Hypotecarias (mortgage bonds), Mutuos Hipotecarios Endosables and Mutuos Hipotecarios No Endosables. The maximal loan-to-value (LTV) ratio depends on the product. The maximum LTV ratio allowed by law is 75 per cent of the appraised value for Letras Hypotecarias and 80 per cent for Mutuos Hipotecarios Endosables. For Hipotecarios No Endosables there is no special limit so that an LTV ratio up to 100 per cent is offered. In 2008, around 90 per cent of all mortgages had a fixed real interest rate. To keep the real interest rate stable over time the loans are expressed in indexed, inflation adjusted (daily) units – the Unidad de Fomento. To help those families with no or limited access to the private housing finance system, the Chilean government has established several support programs. Common to all programs is the requirement of a minimum quantity of savings and a minimum seniority of the savings accounts. The subsidies targeted to the poorest households cover (together with the necessary savings) the costs for a basic house. Households which are better off but still eligible for a subsidy program have to go to the mortgage market to complete their home financing. The government offers credit enhancements to the lenders of such loans. The government offers also subsidies for the supply side although it substantially reduced its commitment in the last years.
House Price Development
From 2001 to 2007 house prices have been increasing with an annual average growth rate of over 4 per cent. Especially since 2006, prices have started to increase steadily and substantial.
The kind of funding of the mortgage market activities depends heavily on the type of product. Mortgage bonds are the sole funding instrument for Letras Hypotecarias. The market share of this product was 31.1 per cent in 2006. Mutuos Hipotecarios Endosables had a market share of 10.3 per cent in 2006 and can be securitised. However, only around 20 per cent of these mortgages are securitised (as in 2007 around 2 per cent of all mortgages were securitised); the remaining loans are sold to qualified institutional investors. With a share of 58.7 per cent Hipotecarios No Endosables are by far the most important mortgage instrument – as its flexible terms enjoy growing popularity with banks and borrowers. These mortgages are mainly financed with emissions of long-term senior and subordinated corporate bonds.