Why Panama Mortgage Rates Don’t Follow the US Federal Reserve

Understanding why your Panama mortgage rate lives its own life If you’re considering buying property in Panama, you’ve probably noticed something that confuses a lot of buyers: even though Panama uses the US dollar, mortgage rates here don’t follow what’s happening with the Federal Reserve.

When the Fed cuts rates, you might expect Panama rates to drop too. But that’s not how it works. We regularly see Panama rates stay flat - or even increase - while US rates fall.

After helping over 100 clients secure financing in Panama, we’ve learned exactly why this happens. Here’s what you need to know.

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SAME CURRENCY, DIFFERENT RULES

Panama has used the US dollar since 1904 - over 120 years. The Balboa (Panama’s official currency) only exists as coins. Every bill in your wallet here is printed by the US Treasury.

So why don’t rates follow US monetary policy?

Because Panama’s banking system operates completely independently. And once you understand how it works, the rate differences make perfect sense.

THERE’S NO CENTRAL BANK

Panama is one of the only countries in the world without a central bank. The Banco Nacional de Panamá handles government banking, but it can’t:

•⁠ ⁠Print money

•⁠ ⁠Set benchmark interest rates

•⁠ ⁠Provide emergency liquidity to banks

This means there’s no mechanism to transmit Fed policy into Panama. Each bank here sets its own rates based on its own costs and market position.

BANKS FUND THEMSELVES THROUGH LOCAL DEPOSITS

This is the big one most people miss.

US banks can borrow from the Federal Reserve at the Fed Funds rate. When the Fed cuts, their cost of funds drops immediately.

Panamanian banks don’t have that option. They fund their lending through:

•⁠ ⁠Customer deposits (savings and checking accounts)

•⁠ ⁠Time deposits and CDs (currently paying 3-5% per year)

•⁠ ⁠Interbank lending from other local banks

To attract deposits, banks here must offer competitive rates. Right now, you can get 3.5% on a savings account and up to 5% on a longer-term CD.

Think about what that means: if a bank is paying 4% to depositors, it needs to charge significantly more on mortgages just to cover costs and make a profit. That’s true regardless of what the Federal Reserve does.

This deposit cost creates a floor for lending rates that simply doesn’t exist in the US system.

NO SAFETY NET MEANS HIGHER RESERVES

Because there’s no central bank, there’s no lender of last resort. If a bank faces a liquidity problem, it can’t call anyone for emergency funding.

The result? Banks here maintain massive liquidity reserves - currently averaging 56-60% of deposits. That’s far above the regulatory minimum and much higher than US banks hold.

This conservative approach keeps the system stable (Panama has had very few bank failures), but it also increases operating costs. Those costs get built into loan pricing.

COUNTRY RISK ADDS A PREMIUM

Every country has a risk premium that affects borrowing costs. Panama’s sovereign credit rating directly impacts what banks charge.

In 2024, Fitch downgraded Panama from investment grade. Moody’s and S&P have negative outlooks. This increased the risk premium banks need to charge.

We saw this play out in real time: while the Fed was cutting rates in late 2024, several Panamanian banks actually raised their mortgage rates. The country risk premium outweighed any benefit from lower US rates.

THE 12-18 MONTH LAG (WHEN RATES DO MOVE)

Even when Fed changes eventually affect Panama, it takes time. Based on what we see in the market, you’re looking at 12-18 months before any Fed movement shows up in local rates - if it shows up at all.

Why so slow? Banks need to see sustained trends before they’ll lower what they pay depositors. And only after deposit rates fall can lending rates follow.

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WHAT THIS MEANS FOR YOU

Understanding Panama’s independent rate environment helps set realistic expectations:

• ⁠DON’T WAIT FOR FED CUTS TO BUY

Panama rates may never follow. The property you want today will cost more tomorrow regardless of what happens in Washington.

• EXPECT RATES BETWEEN 6-8%

This is normal for Panama. The reference rate is currently 6.25%, and foreign buyers typically pay 0.5-1.5% above that. You’re not being overcharged - this reflects the real cost of lending here.

• ⁠⁠FOCUS ON TOTAL COST OF OWNERSHIP

Higher rates don’t tell the whole story. Panama offers lower property prices than most comparable markets, property tax exemptions on new construction, and strong rental yields. When you do the full math, the value proposition is often better than buying at lower rates elsewhere.

• WORK WITH SPECIALISTS

Not every bank works with foreign buyers, and the ones that do have different requirements and pricing. Knowing which banks to approach - and how to present your application - can make a meaningful difference in your rate.

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Panama’s banking system is stable, well-regulated, and conservative. It’s also independent from US monetary policy.

The dollarization gives you currency stability - your mortgage and rental income are both in dollars with no conversion risk. But it doesn’t give you direct access to Fed rate cuts.

For expats buying property here, that means evaluating Panama financing on its own terms. The rates are higher than the US, but the overall package - stable currency, tax benefits, quality of life, and strong fundamentals - continues to attract buyers from around the world.

Ready to explore your financing options? The Expat Mortgage Broker specializes in helping foreign buyers secure competitive terms in Panama. Contact us at www.theexpatmortgagebroker.com