Things to consider when taking a mortgage in Russia

With analysts tipping a rebound in real estate prices underpinned by mortgage lending growth Business RT spoke independent expert, Maxim Grishak, about the things to think about when looking at mortgages.

RT: What are the main issues Russians should consider before taking a mortgage?

MG: “Of course, the interest rate is most important. Logically, the lower it is, the better it is for a client. Even a 0.25% cut of an interest rate will result in a significant overall saving –given the period of payments.

I’d also pay much attention to the currency you are going to take a mortgage in. It’s a really important question, because today there is a wide choice and some companies offer credits even in Japanese yen. For those who get their salaries in roubles my advice for today would be to take a mortgage in roubles – this is to avoid the affects of possible shocks from currency fluctuations. In fact, there is no a universal formula, and if someone understands how to hedge currency risks, that’s ok.

And the last thing that really matters is the option to pay back money in advance partially or in full. Some banks introduce a moratorium on this or significantly limit this ability either in terms of time or by means of additional charges and fees. In a mortgage contract a bank can ban making advance payments during the first 5 years, for example. Or it can limit a sum of a payment – say, one may not be allowed to pay less than $5 thousand. And the last alternative is that a bank can allow payment in advance, but with a charge for that.

It’s important to clearly understand that mortgage contracts are good for banks, as it’s a long term arrangement that enables a bank to calculate its profitability for a long period of time.And it’s logical that a bank wants to get compensation for possible unexpected losses.”

RT: What “surprises” do Russians usually face when they conclude a mortgage contract?

MG:“Something that is important that often becomes a surprise is that they aren’t allowed to sell a flat as well as rent it or redesign it without the bank’s written permission. In reality people sometimes rent a flat at least partially to cover their expenses on a monthly mortgage payment. But one should clearly understand that if the bank banned renting in the mortgage contract and got to know about the violation, it has a legitimate right to either charge some kind of a fee or claim the debt in full and in advance.

The need to annually pay additional insurance fees also often becomes an unpleasant surprise for a person, though it’s usually stipulated in a contract. Basically, there are 3 types of insurance: life and health insurance of both the client himself and his co-borrower, insurance against the risk to loose a proprietary right and one against the risk of any damage to a flat, which can become a result of, say, an earthquake or any other disaster. There can be either 3 separate contracts or a single one, called a contract of complex insurance, which usually involves a lower interest rate. Generally speaking, the sum of insurance payments is, as a rule, no lower than 1.5 – 2% annually of the money borrowed. That’s a significant sum and should certainly be considered.

Also, it’s highly important to carefully check the legal status of a flat, to make sure there’s nobody else claiming it. There was one case in Russia, when a young couple concluded a mortgage contract, and started to make payments, and later some other people appeared, who certainly had a legal proprietary right for a flat. For some reason the insurance company refused to pay and the bank wanted its money back. The legal process can take about a year and a half, but meanwhile those young people are in the situation, where they need to pay both mortgage fees to the bank for a flat they don’t really have and a rent for flat they are living in now.”

RT: Isn’t it the duty of a bank to clearly explain the main issues of a mortgage contract and put all the emphases correctly?

MG: “If we lived in a perfect world – yes. But, given all the different products and lenders that we have today in the market, personally I believe, that in our country those who decide to use such a complicated financial tool as mortgage need to make the effort and try to understand all its mechanisms and study all possible scenarios. To fully rely on somebody else, the Government, a bank or a realtor, isn’t an option in Russia, I think.”

RT: What are the effects if a client finds himself unable to pay back his debt to a bank?

MG: “Here it’s important to understand that in the case with a mortgage a bank is a partner to its client, not his opposition. There’s nothing extraordinary if a person finds himself unable to bay back his debt. It’s essential not try to conceal the fact from the bank, better to discuss the options with it. In fact, a bank can restructure payments or cut the rate or offer a delay in payment, provided some fee is charged later for that. The worst possible scenario is when a bank exercises its legal right to sell a flat compulsorily. But actually I don’t remember any actual examples of such cases – banks are usually amicable and leave the opportunity to sell to a debtor.”

RT: What’s your general perception of a mortgage in Russia?

MG: “Mortgage is a really highly risky instrument that requires financial competence and experience of operating with other financial instruments – at least bank deposits. Taking a mortgage means that a person calculates his expenses, that he has some money in reserve to be able to make payments for at least 3-6 months, that he keeps an eye on the market situation. Taking mortgage really requires high level of financial discipline.

Also, in my view a mortgage makes a person significantly less mobile and limits ones freedom, since it’s long-term and involves a lot of obligations.”

­Anastasia Kostomarova, RT