New plans have emerged for buying houses that are still under construction in Russia, and these plans bring clear risks for buyers. The Central Bank of the Russian Federation has issued warnings that deserve close attention.
Some banks, in collaboration with developers, have started offering Russians a route to join construction projects through mortgage contracts for participation in joint construction (DDU). In this arrangement, part of the money that would normally fund the apartment is placed in a letter of credit instead of an escrow account.
The appeal for borrowers lies in the potential for savings. Lenders may share a portion of the extra income generated from the deposited funds as a discount on the mortgage rate during the construction phase, making the loan initially more affordable.
The risk, however, is substantial. Unlike escrow accounts, funds held in a letter of credit are not insured in any formal way. If the bank loses its license or faces insolvency, a buyer may find both the invested funds and the completed apartment jeopardized, with the loan still outstanding because the DDU may not be fully funded.
There are occasions when developers might transfer ownership of real estate to affiliated parties during construction and then enter into a partnership at a price far below market value. In such cases, funds are deposited into an escrow account, offering a layer of protection through safeguards.
When the transfer occurs, the buyer typically pays the full market price, yet the escrow account may reflect only the original discounted price plus the claim rights under the DDU. The resulting difference can flow to the vendor affiliated with the developer, rather than remaining in the escrow pool where it would be available to secure interests and protect the buyer.
As of March 1, there were tighter controls on mortgage lending to Russian borrowers. The impact of these changes is a subject of scrutiny and discussion in financial media and consumer guidance outlets, including analyses such as those in socialbites.ca (attribution: Central Bank updates and market analyses).
Earlier reporting highlighted how a typical mortgage debtor profile has looked in Russia, emphasizing the balance between affordability and risk, and underscoring the importance of understanding the legal structure behind each financing arrangement (attribution: market-wide mortgage reporting).