Canadia Bank Ltd has started issuing Cambodia’s first-ever mortgages, enabling many buyers who could not afford the full cost of a house to pay for newly purchased homes over several years, a bank official said recently.
“This is a new concept in Cambodia—to use the mortgage buying system to give people the opportunity to own houses,” said Yee Con Long, the bank’s financial controller. The bank will offer mortgages for 102 Phnom Penh houses built by its partner in the project, The Banker City Co, Ltd.
“We want to sell this idea to people who can’t afford to pay all at once,” he said.
Unlike regular loans, in which a bank lends money in exchange for collateral, in a mortgage, the bank actually buys the property in question and holds title to it until the loan is repaid. If the buyer can’t repay the bank, the bank can take possession of the house. No collateral is required.
In developed countries, mortgages are the normal way of purchasing property. But in Cambodia, where the banking sector is notoriously weak and an overwhelming majority of the population keeps its savings in cash or gold, the practice is novel.
Canadia and Banker City’s project is aimed at the upper class—its target is families with incomes of $700 or more per month.
Banker City offers customers a choice of four designs for the houses, which will be built to order on 3.5 hectares of land on Norodom Boulevard near the Ministry of Interior, in Chamkar Mon district. The houses cost $44,000 to $168,000, Yee Con Long said. Buyers must pay a $2,000 to $5,000 deposit to begin construction on the houses. Once they are built, the buyers must pay half the remaining cost within eight months.
The rest of the money is loaned by the bank at an interest rate of 10 percent. The repayment period is 36 months (three years) to 100 months (eight years and four months). Once the balance is 100 percent paid, the buyer receives title to the land and house. Half the houses have already been snapped up, Yee Con Long said.
Introducing mortgages has the potential to stimulate the economy, government economic adviser Bit Seang Lim said, but he expressed doubt that Cambodia’s weak institutions are ready to support such a practice.
Mortgages encourage people to buy houses and borrow money, boosting the real-estate and banking sectors simultaneously. And by making house ownership within reach of more than just the very wealthy, they encourage people to work hard and save money, he said.
“In other countries, the mortgage system was a key to making the economy grow because the interest rate is low and both the buyer and the financing company are under legal protection,” he said.
But, he noted, legal protection depends on a reliable legal system. “In Cambodia, lawsuits are difficult because of the poor justice system,” he said.
Bit Seang Lim, who worked in banking and the stock market in the US, said cultural factors are also involved. “Cambodian people are reluctant to owe money,” he said. “They are afraid to lose face if the [bank] takes the house back when they can’t afford to pay.”
He noted that 10 percent is a high rate compared to other countries, reflecting the lack of trust between Cambodian borrowers and lenders. The global economic slowdown has pushed the interest rate in Japan down to zero percent, in the US to 1.75 percent and in Europe to 3 percent.