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19 Jul, 2008 11:40

Time to grow! Russians getting used to taking a mortgage

The Russian mortgage market turns 10 this year. While it still takes up only two per cent of Russia's GDP it’s growing quicker than the latter.

Around 40 billion dollars of debt can be good news if you are a growing mortgage market. That's the total amount of outstanding debt in the decade-old Russian home loans market.

Last year 14 per cent of homes in Russia were bought using a mortgage. That figure is expected to increase by 50 percent this year. However, analysts say mortgages are still not available to Russia's middle class.

An average monthly mortgage payment in Russia is about 700 dollars. But that's out of the budget of all but 20 per cent of Russians.

The federal mortgage agency has plans to provide new, low-cost mortgages for the broader middle class.

“Currently we are thinking about implementing a new credit product for people who earn between four and eight thousand dollars a year. The new mortgage tool will have a different payback schedule and will be adjusted so that it remains affordable,” says Aleksandr Semenyaka of Federal Mortgage Agency general.

Crisis in the western financial markets means it is harder for Russian banks to raise funds. But the main obstacle to mortgage growth is the price of real estate.

While in Europe housing prices are going down in Russia they continue to gallop. Cost aside, getting a mortgage is no harder than in other countries, even for foreigners.

“It is actually a very smooth process and now I'm really glad I did it because the best investment ever made in Russia was taking a mortgage cause the price has gone up about ten times since I took it. I think the biggest obstacle for foreigners is most foreigners think you can not own property in Russia which is ridiculous,” says James Cook of Aurora Investment Advisors.

Russian mortgage lenders have strict policies on underwriting. Russians have to prove their income is taxable and comes from a reliable source.

“Generally, we are still working on what we can say top of the cream. Here we are more strict, we are more formalised, we mainly make the decisions on case by case basis rather than on some kind of strict policy or up to scoring models or something like that. So mortgage in Russia is still rather unique and fine tuned product rather than a consumer finance type of thing,” believes BSGV deputy chief Ivan Anisimov.

In terms of applying for a mortgage, Russia is similar to the U.S., where the number of transactions is almost seven times greater.

“I've taken mortgages in the U.S. and also in France and I have to say that here it is a lot easier. You just give your information on your income, your expenses. The only other thing is you have to go take medical exam,” James Cook says.

The upside to Russia's strict underwriting rules is a very low rate of default by borrowers, which is currently less than one per cent.