Mortgage risk premiums rise in Russia as debt burdens tighten lending

As of March 1, 2024, the central bank will raise the so-called mortgage risk premiums. Higher premiums mean bigger capital buffers banks must hold to issue a home loan. For instance, a 6 million ruble mortgage with a premium of 9 would require a capital reserve of 54 million rubles, a significant shift in lending economics. [Central Bank of Russia]

From that date, premiums for housing loans extended to borrowers with a debt load exceeding 80 percent of their income will go up. Such borrowers devote more than 80 percent of their earnings to loan payments, and the new rules tighten access to mortgages for those already highly leveraged. The bank’s press service described the changes as effectively prohibitive and markedly restricting lending to overextended borrowers. [Central Bank of Russia]

Even with substantial down payments, the risk coefficient for these borrowers will rise. For example, under a joint construction contract with an initial 20–30 percent payment and income taxes above 80 percent, the risk coefficient climbs from 3 to 7. In practical terms, financing a 6 million ruble loan to such a borrower would demand a capital reserve of about 42 million rubles. [Central Bank Press Service]

Should a bank decide to approve a mortgage for a high-risk borrower, it will likely set a higher interest rate to compensate for costs and potential losses. That perspective was voiced by Alexey Voylukov, deputy chairman of the Association of Russian Banks. [Association of Russian Banks]

Data from the central bank show that in the fourth quarter of 2023, mortgage loans issued to individuals with income taxes above 80 percent accounted for 45 percent of all mortgage activity. The central bank indicated that the goal of the new measures is to reduce the share of such loans, while noting it is too early to judge 2024 outcomes. [Central Bank of Russia]

Who will find it more difficult to get a mortgage?

Anatoly Aksakov, head of the State Duma Committee on Financial Markets, told socialbites.ca that starting March 1 it will become harder for Russians carrying high debt burdens to obtain loans. He argued that the restrictions are meant to lower default risk when payments exceed a large share of income. [State Duma Committee on Financial Markets]

Maria Ermilova, a candidate of economic sciences and associate professor at the Russian University of Economics for Sustainable Development, noted that if a borrower’s debt load consistently stays well above 80 percent, banks are likely to reject the application. She warned that even a rise of more than 50 percent could trigger a bank’s “bell” for refusal. Previously, about 47 percent of loans carried high personal income tax, a figure expected to fall with these measures; more loans may demand down payments above 20 percent, while lower down payments could decrease further. By late 2023, the share was around 15 percent. [Ermilova, RUEDS]

Aksakov expects more rejections for mortgage borrowers because even with a sizable down payment, higher reserves will be required. BitRiver analyst Vladislav Antonov suggested that the default rate could rise to 15–20 percent by the end of 2024. [BitRiver Analysis]

Analysts note that large banks may face less funding difficulty when adjusting coefficients, but for loans with small down payments the share of high-risk loans (above 80 percent) could drop significantly. [Banking Sector Insights]

Central Bank data show that the share of housing loans with down payments up to 20 percent declined from 50 percent in Q3 2023 to 15 percent in October–November 2023. Forecasts point to slower housing loan growth in 2024, from 20–25 percent in 2023 to 10–15 percent in 2024. [Central Bank Projections]

What happens to the mortgage next?

Aksakov believes the central bank’s measures should stabilize the mortgage market, with Ermilova predicting stabilization toward summer. The belief is that loans issued before the reforms, though riskier by nature, remain in the system and can be absorbed by banks. It is possible that debt burdens will ease by several points by mid-year as lenders adjust. The share of high-down-payment mortgages is expected to stay relatively steady. [Market Commentary]

Antonov estimates that the portion of high-risk loans (with a risk premium above 80 percent) may fall to 30–35 percent by the end of 2024, signaling a stabilization and reduced risk in the mortgage sector. Aksakov also indicated further revisions to central bank appropriations could occur in the future, with potential expansion of the bank’s macroprudential tools to regulate risk more flexibly. [Analysts and Officials]

Experts note that easing the central bank’s restrictions is unlikely until the share of mortgages with debt loads above 80 percent returns to the earlier level around 37 percent, from the current near 47 percent. The overarching aim of stricter constraints is to cool the primary real estate market and curb prices, which have run markedly higher in the primary market than in the secondary market. [Market Experts]

How to increase the likelihood of being granted a loan

To lower the debt burden and improve approval odds, borrowers are advised to provide complete income information to lenders, reduce loan size, and consider bringing additional borrowers onto the mortgage or repayment plans. The central bank’s press service recommended these approaches. [Central Bank]

Ermilova suggests that those rejected should either save enough for a larger down payment to avoid consumer debts or wait for market stabilization before reapplying. She also notes other housing purchase routes such as installments or consumer loans that take timely repayment into account. [Ermilova]

Aksakov highlights that the current market emphasis is on new-build apartments, which may prompt developers to offer alternative purchase options such as installments. Nevertheless, he stresses that turning away loan requests due to a borrower’s high existing debt remains a prudent risk-management stance. [Aksakov]