Also known as home equity, credit with real estate collateral (CGI) is still an uncommon type of loan in Brazil, but one that has been growing little by little and has become more attractive in times of pandemic.
According to data from Brazilian Association of Real Estate Credit and Savings Entities (Abecip), the volume of concessions grew 50.3% from January to June 2021 compared to the same period in 2020. According to the organization, the volume of credit granted in the modality is R$ 12.3 billion, distributed among approximately 95 thousand contracts.
In the case of Credihome, fintech specializing in real estate operations, the search for this type of loan grew more than 1,400% in the first half of this year compared to the period from January to June in 2020. The concessions were 200% larger.
Among traditional institutions, the Santander, for example, registered a 32% jump in the home equity portfolio from January to June 2021, with BRL 2.7 billion granted, reaching 25% of the market share.
The main reasons for requesting the CGI are renovations of the property itself, payment of debts with higher interest rates and investing in its own business.
What draws the most attention in this type of loan are precisely the interest, which is usually lower than the payroll-deductibles, depending on the financial institution. There are lines with rates starting at 0.60% per month and correction for IPCA inflation or fixed at 0.78% per month.
In general, there is a minimum amount for the operation to be made possible, between BRL 30 and BRL 50,000. The ceiling reaches millions of reais. It all depends on the value of the property used as collateral.. The maximum concession fee is usually limited to 60% of the property’s price. The terms can reach up to 240 months, although on average the contracts have a much shorter duration, on average 10 years according to Abecip.
However, even with lower interest rates, many people are afraid to go for this alternative for fear of losing the property. This is because, as the name suggests, the guarantee in the event of non-payment of the debt is precisely the taking of that asset.
“We have a challenge for this market to gain traction, due to people’s lack of knowledge and a cultural factor. We have a long way to go, but there is demand”, says the president of Abecip, Cristiane Portella, during a conference with journalists.
Home equity has a longer approval time than other loans as payroll and personal credit, because it involves inspection of the good that will be used as collateral, transfer of registration registered in the registry.
“The contract has to go to the notary’s office to ensure that the property’s registration is sold. It’s a credit that takes a while to reach the client, it takes a few weeks, depending on the institution. We try to make it faster because time is important. The client decides to take short-term credit, which is much more expensive, because it happens in hours,” says the president of Credihome, Bruno Gama.
Once the process goes forward, the property is temporarily transferred to the creditor (bank or fintech that lent the money) until the debt is paid off. This is what is called fiduciary alienation. During the period of the loan, the owner continues to be able to use his home and you can even sell it, as long as the money is used to pay off the debt.
The debt foreclosure process (for taking the property) can be time-consuming and costly for the creditor. It even involves an auction of the property. From the amount collected in the auction, the financial institution pays off the debt. If the auction has an amount that exceeds what is owed, this change must be directed to the defaulting customer, the one who lost the property.
“The same people who take out mortgages fear home equity. But the two follow the same fiduciary sale process. When the customer does not pay on time, there is an interest in talking and renegotiating. The resumption is a costly process that does not interest anyone”, adds Gama. He also informs that the cycle can take up to a year to be completed.
Last year, Provisional Measure 992 allowed a financed property to be used as collateral for the home equity, as long as it had a part paid off and that the loan was granted by the same institution that granted the purchase credit. Thus, some banks, such as Itaú, even offered credit lines under these conditions, with interest of 0.56% per month.
However, the MP expired and now it is not possible to perform these operations. Only those who have fully paid off residential or commercial properties can apply for the loan.
For Gama, the regulatory issue can help Brazil achieve the true potential of home equity, a type of long-term credit, healthier for those who need money, especially when compared to other lines. He claims that in markets like United States and Europe, it is already quite common.
Before taking out a loan, it is worth researching and understanding the conditions of each institution. In addition to the fees, it is interesting to consult the value of fees and the grace period, which is the deadline to start paying the installments. In some cases, it can be as long as three months.
Although CGI rates are among the friendliest in the market, it is still worth highlighting the importance of carrying out a wide research before compromising your property in one of these operations.
More than the interest itself, those interested in resorting to home equity should be aware of the costs of the operation, such as asset valuation fees and IOF and also the indexes that correct the installments, such as inflation and Referential Rate (TR).
Home Equity Conditions Comparison
|Institution||Rates from (monthly)||Minimum value||Deadline|
|Box||0.60% + IPCA or 0.70% TR or fixed rate 0.80%||Uninformed||180 months|
|Itaú||Prefixed 0.94%||BRL 40 thousand||180 months|
|Santander||Prefixed 0.95%||BRL 30 thousand||240 months|
|Bank of Brazil||Prefixed 0.78%||BRL 35 thousand||238 months|
|Bradesco||Prefixed 0.99%||Uninformed||180 months|
|credits||0.79% + IPCA||BRL 30 thousand||240 months|
|Credihome||0.74% + IPCA||BRL 50 thousand||240 months|
In the case of lines linked to the IPCA, there is a correction of the outstanding balance. The customer is subject to the risk of fluctuating inflation and installments may be less predictable. In the last 12 months, the index accumulated a high of 8.99%. In July alone, the IPCA rose 0.96%.
To try more predictable plots, borrowers should seek fixed or fixed lines by less volatile indexers such as TR, which is currently at 0%. just by offer less fluctuation, these lines tend to have slightly higher interest rates. Therefore, it is worth analyzing what kind of risk you are willing to take at the time of the commitment.
The profile of those seeking home equity is mainly formed by entrepreneurs looking to invest in their own business or people who want to make improvements at home. According to credit fintech Credits, among your customers credit with property guarantee, 39% used the money to pay off debt, 20% for entrepreneurship and 8% for reforms.
the financial advisor Luciana Ikedo he says that this type of credit, with lower interest rates and longer term, is welcome precisely for those involved with more expensive short term debt, such as credit card, overdraft and even payroll. She recalls that the most important thing is to calculate whether the installments will really fit in the pocket, without ever extrapolating 30% of the family’s gross income.
“In these cases, it is interesting to add up all the debts and extend it into a single, long-term operation, with a lower cost and especially that fits into the budget,” he says.
In a way, the borrower in these cases tends to be less indebted in other more common lines of credit. According to the fintech survey keycash, of its CGI client base, 45% are entrepreneurs, 17% are salaried and 15% are self-employed.
“Increasingly known, home equity is suitable for debt reorganization, including the exchange of heavier debts, such as credit card and overdraft; the investment in the business itself; or starting a new company. It can also be used for renovations, travel, studies abroad, such as graduation or exchange, among others,” he says Sandro Gamba, director of real estate business at Santander.
The default rate is also considered low among these customers, which allows to keep rates at lower levels, since lenders interpret that the risk of default is lower and that the guarantee is something as valuable as a property.
The use of CGI is also indicated for these people, who wish to increase the business and must have a return on investment in order to make the payment of the debt viable and ensure the maintenance of the property.
Renovation of the house, also a strong reason for this, can be a good use considering that, if done well, it has the potential to add value to the property.
“Whether to improve the environment in which you live or even enhance it and then sell or rent it, the search for credit with a property guarantee has been a way out for those who already have the residence and want to obtain extra value to improve it”, affirms Creditas executive, Maria Teresa Fornea.
The contraindication goes to those who want to borrow for consumption, such as traveling or shopping. For this type of expenditure, it is recommended that there is patience and financial planning to gather the necessary money and afford the objective. According to financial advisor Luciana Ikedo, there are three situations in which the loan with a property guarantee must not be applied for.:
- when the value of the installment does not fit in the budget;
- when the operation is at the limit of what fits in the cash flow, however, it will be used for something that may generate more expenses or costs;
- when the total amount released is not enough to solve the most critical financial situation, and the borrower may compromise the monthly cash flow and still have expensive debts that need to be paid in the short term.
Difference between other credit lines
But, after all, why put your house in the name of a bank to get a loan? First of all, for the cheapest rates. To get an idea, home equity fees are 10% to 15% per annum, versus 300% per annum for credit card fees or 150% per annum on overdraft.
In comparison to payroll, the property is considered a more solid guarantee than the salary. That is why, banks tend to offer even lower rates for CGI compared to payroll.
For those who want higher values, the home equity ceiling is also much higher. Furthermore, the operations are long-term, up to 20 years, in relation to the short and medium-term payroll period, which lasts up to seven years.
“This is a type of credit that provides very relevant savings to customers, with very reduced installments, considering that today it is the personal loan line with the most affordable rates on the market and with a payment term that can reach 15 years, in the case of Itaú”, he says Thales Ferreira Silva, director of Itaú Unibanco.
— Photo: Getty Images