From March 1, 2024, the Central Bank will increase the so-called premiums on mortgage risk rates (the higher such premiums, the greater the capital reserve the bank needs to issue a mortgage loan: for example, to issue a home loan of 6 million rubles with a mortgage premium of 9, the bank will need a capital reserve of 54 million rubles).
“As of March 1, the premiums for housing loans given to people whose debt burden ratio (DLI) is over 80 percent, that is, who allocate more than 80 percent of their income to loan payments, will be increased. Allowances are essentially prohibitive and Significantly limiting the provision of mortgages to borrowers who are already overleveragedThe press service of the Central Bank of the Russian Federation told socialbites.ca.
Even in cases where the down payment is high, the credit risk coefficient will increase for such borrowers. For example, from March 1, the risk coefficient of loans under a joint construction contract with an initial payment of 20-30% but personal income tax above 80% increases from 3 to 7 (That is, in order to give a loan of 6 million rubles to such a borrower, the bank needs to produce capital of 42 million rubles)
“If a bank decides to give a mortgage to such a borrower, it will have to give it at a high interest rate to compensate for its costs and cover possible risks,” said Alexey Voylukov, deputy chairman of the Association of Russian Banks.
According to the Central Bank, in the fourth quarter of 2023, mortgage loans with personal income tax above 80% accounted for 45% of all mortgage issuances.
“The aim of the new measures is to reduce the share of such loans. The press service of the Central Bank stated that it is too early to evaluate the results of 2024.
Who will find it more difficult to get a mortgage?
Anatoly Aksakov, chairman of the State Duma Committee on Financial Markets, explained to socialbites.ca that starting from March 1, it will become more difficult for Russians with high debt burdens to get loans.
“But that’s why the restrictions were introduced, because if a citizen’s loan payments constitute more than 80 percent of his income, the risk of such a citizen falling into default is very high. And of course, there should be significantly fewer such subprime loans, especially in mortgage loans.” – added the deputy.
Candidate of Economic Sciences, Associate Professor of the Department of Finance at the Russian University of Economics for Sustainable Development. GV Plekhanova Maria Ermilova explained that if borrowers’ PDN is significantly above 80%, banks will most likely reject them.
“It can even be noted that an increase of more than 50 percent will already be a “bell” for the bank and therefore there may be rejection. If the share of loans with high personal income tax was previously 47%, it should start to fall with these measures. More loans will be issued with higher down payments of more than 20 percent. And with the lower one it will decrease further. By the end of 2023, this rate was already 15%,” explained the economist.
Aksakov thinks there will be more rejections for mortgage borrowers because even having a sufficient down payment with a high PNI rate will require banks to increase their reserves. BitRiver financial analyst Vladislav Antonov admitted in a conversation with socialbites.ca: failure rate may rise to 15-20% by the end of 2024.
“Coefficients to introduce for large banks are probably less difficult. “But if we take the example of how the increase in the risk coefficient affects loans with low down payments, then the share of high-risk loans with personal income tax above 80 percent will significantly decrease,” he emphasized.
According to the Central Bank of Russia, the share of housing loans with a down payment of up to 20 percent decreased from 50 percent in the third quarter of 2023 to 15 percent in October-November 2023. According to Central Bank forecasts, housing loan growth in Russia may slow down from 20-25 percent in 2023 to 10-15 percent in 2024.
What happens to the mortgage next?
Aksakov believed that the Central Bank’s measures would stabilize the mortgage market in Russia. Ermilova expects this to happen closer to summer.
“There is now a volume of loans already given, and since they were given before the innovations, they are partly high risk and accepted by the bank. It is estimated that the debt burden of Russians will probably start to decrease by 10 points or more towards the summer, thanks to the measures taken by the Central Bank. The share of low down payment mortgage loans will most likely remain the same,” Ermilova concluded.
According to Antonov, the share of high-risk loans (with a PPV above 80%) may decrease to 30-35% by the end of 2024.
“This will mean a certain stability and reduction of risks in the mortgage loan market,” the analyst said.
Aksakov also admitted that the Central Bank’s appropriations may be revised in the future.
“The Bank of Russia pointed out that when increasing premiums in the autumn of 2023, there is no opportunity to impose macroprudential limits on mortgage loans and limit the share of risky loans with their help. Therefore, now in the State Duma is being considered A bill providing for the granting of such powers to the Bank of Russia. “Thus, the regulatory mechanism will become more flexible and there will be an opportunity to revise the appropriation amounts,” he said.
We should not expect an easing of the Central Bank’s restrictions until the share of mortgage loans with personal income tax above 80% returns at least to the previous 37%, BCS World of Investments stock exchange expert Lyudmila Rokotyanskaya told socialbites.ca. from the current 47%.
“The aim of the enhanced restrictions is not only to protect people with high debt burdens, but also to significantly cool the primary real estate market. According to the Central Bank, prices in the primary market are 40% higher than prices in the secondary market,” Rokotyanskaya explained.
How to increase the likelihood of being granted a loan
To reduce the debt burden and increase the likelihood of approval of a mortgage application, the borrower can provide the bank with complete information about his income, reduce the size of the requested loan, and also attract additional borrowers to the mortgage loan or repayment. Available loans were recommended by the press service of the Central Bank.
According to Ermilova, Russians who are rejected for a mortgage need to either save a large amount so that the down payment is larger and do not have to take out a consumer loan for it, or postpone the purchase until the market stabilizes.
“Or, depending on your financial situation, consider other options for purchasing housing – installments, consumer loan, taking into account the possibility of timely and without consequences closing,” the economist added.
According to Aksakov, the main sales segment now is apartments in new buildings. Therefore, developers can provide other mechanisms for the sale of housing, for example, on installments.
“But in general, refusing to provide borrowed funds due to the citizen’s already high debt burden is still a balanced and reasonable approach to the bank’s risk assessment,” Aksakov added.