OREANDA-NEWS. August 24, 2015. Recent reforms to Mexico's mortgage regulations, aimed at making mortgage transfers from one bank to another less costly for borrowers, may hold back the upward movement of lending rates on mortgage loans when interest rates eventually rise, says Fitch Ratings. The reforms encourage lender competition and limit the benefit of higher net interest incomes that normally accompany rising interest rates.

Mexico's reforms were enacted in January 2014 under the Law of Transparency and Promotion of Competition within Guaranteed Credit, which took effect Aug. 20. The timing of the effective date is relevant because although the eventual US rate increases are expected to have a positive knock-on effect for upward pressure on Mexican domestic mortgage rates, we expect a slower and smaller magnitude response versus pre-reform.

Mortgage transfers have been possible in Mexico, but their high costs have deterred most customers from choosing to transfer in order to obtain a better rate. When customers did make transfers, banks could not reasonably count on winning most of those customers' banking business, as they tended to stick with their original lender for nonmortgage business.

Mexico is hoping that better transferability of mortgage loans will result in competition that aids home affordability across the market. Mexico's mortgage borrowers (especially bank customers) have exhibited relatively low delinquency rates and a good history of growth, albeit from a relatively small base. Mortgage loans are typically granted to customers with ample positive credit history who have demonstrated strong payment ability. Thus, with loan demand from enough good customers remaining solid, more lenders may be drawn to the market.

The average interest rate on mortgage loans offered by banks has fallen to 10.59% as of June 2015 from an average of 12.80% in 2008. A more comprehensive measure of mortgage expenses, including interest rates and fees (a mortgage's total annual cost) dropped to 13.15% as of the end of June, about 0.17% lower than year-end 2014, as seen here.

Fitch expects Mexican banks to continue achieving fair growth in mortgage lending as slower increases in rates should keep mortgage rates competitive for borrowers. Sustained growth will also depend on the banks' abilities to maintain attractive margins amid more restrictive liquidity rules aimed at encouraging more long-term funding to mitigate asset-liability tenor mismatches.