June Issue: Mortgage down payment requirements have risen. What does this mean for homebuyers?

CrimeaPRESS reports:

From June 1, 2023, the Central Bank will increase the premiums on mortgage loans for the purchase of housing with a down payment (D) of less than 20%. For such loans, banks must generate large amounts of additional funds.

What does this mean for homebuyers, is it now possible to take out a mortgage with a down payment of less than 20%, and what are the consequences of the regulator’s decision? RBC Real Estate dealt with the experts.

What has changed since June 1

As explained to RBC-Nedvizhimost in the press service of the Bank of Russia, from June 1, surcharges apply to mortgages on housing under construction with a down payment below 20%, including preferential programs. At the same time, «surcharges do not apply to mortgages where the debt burden ratio (LL) is not higher than 60%, provided that this is a loan with state support and the installment is not lower than 20%.» In the secondary market, increased surcharges are applied when the contribution is less than 15%. This norm was introduced on May 1, the press service specified.

Now the main preferential mortgage programs apply mainly to new buildings, and the down payment on them is below 20%. For example, within the framework of IT-mortgages, preferential for new buildings, family and Far Eastern, the minimum PV is 15%, and for rural mortgages — 10%.

According to Finam FG analyst Igor Dodonov, the regulator’s decision is due to the desire to reduce risks in the banking system (loans with a low down payment are considered more risky) and slow down the growth rate of Russians’ debt load. Moreover, the demand for mortgages with a small down payment is growing.

The share of mortgages with a low down payment in the first quarter of 2023 for the first time exceeded half of all housing loans and reached 51%, as reported in a recent review by the Bank of Russia. For comparison, a year earlier this figure was at the level of 38%. In addition, the regulator pointed to the deterioration of lending standards in this segment. Therefore, regulatory tightening is aimed at cooling demand for mortgages with a low down payment, since the Central Bank sees risks both in the debt load of the population and in accelerating housing prices due to the availability of such mortgages, added Nadezhda Karavaeva, junior director for banking ratings at the Expert RA agency. .

What are risk factor premiums

The bank is obliged to assess the risk of non-repayment of the loan. The higher the probability, the higher the risk. Risk premiums are introduced by the Central Bank to limit the issuance of loans with an increased probability of non-payment. Since the lender applies an increased risk factor, banks will be required to create increased provisions for a particular loan in order to maintain a sufficient amount of capital.

In practice, the increase in premiums leads to the fact that it becomes less profitable for banks to lend on a certain type of loan and they are less likely to approve loans with such parameters and / or offer higher rates for them. In other words, banks will raise rates.

What does this mean for homebuyers?

With the introduction of surcharges, banks will have to generate large amounts of additional funds for housing loans with a ROI below 20%. To avoid this, they will be forced to raise the minimum contribution or rate. That is, although the surcharges do not prohibit mortgages with a small installment, they make it unprofitable for the bank, since the latter will have to form large reserves.

It will still be possible to get a mortgage loan with a small down payment (up to 20%), but the rate on them will become higher, how much depends on the particular bank— Igor Dodonov explained.

With the increase in surcharges, banks will either have to reserve capital for riskier mortgages, which will reduce the number of loans approved, or pass their costs on to the borrower in the form of an increase in mortgage rates, which will reduce demand and also negatively affect loans, Nadezhda Karavaeva confirmed.

Where it leads

In addition to reducing the issuance of mortgages with a small contribution, the new measures of the regulator, on the one hand, will lead to a decrease in the availability of mortgages, on the other hand, they will slow down the growth in prices for new buildings and reduce the credit risks of banks, Nadezhda Karavaeva continued.

According to Irina Babina, Chief Analyst of the Rosbank Dom Mortgage Products Department, an increase in the down payment will lead to a decrease in the affordability of housing for the population. “First of all, this will affect the poorest segments of the population: a low down payment against the backdrop of rising real estate prices allowed the borrower to become the owner of the apartment right now, without a long wait. Now borrowers from this category will be forced to use more expensive consumer loans and microloans to pay the down payment,” Irina Babina explained.

In this regard, there may be an additional risk, added Igor Dodonov. “The borrower can increase the amount of the down payment to the required amount through a regular consumer loan. Which, accordingly, will increase its debt burden,” the analyst explained.

Central Bank policy and high-risk mortgages

The Central Bank pursues a consistent policy to minimize risks in the mortgage market. The Bank of Russia has already limited mortgages with «extremely low» rates, which, according to the regulator, carried risks for borrowers, banks and the entire housing market as a whole. From May 30, for such loans with a date of issue after March 15, 2023, banks will need to form additional reserves. Also, back in December 2022, the Bank of Russia established prohibitive macroprudential surcharges on mortgages with a down payment of up to 10%.

What are the banks talking about?

The first installment is an important parameter of housing lending, as it demonstrates the solvency and financial behavior of a potential borrower, the press service of VTB Bank noted.

At VTB, the average down payment is quite stable and, based on the results of five months of 2023, is about 23%. There is a demand for a mortgage with an entry threshold of less than 20%; when issuing such loans, the bank always assesses the risks and is guided by the requirements of the Central Bank— explained in the press service.

The press service of Sberbank, citing Domclick data, reported that the average down payment on a mortgage issued by a bank is 30.4%. Since the beginning of the year, this indicator has slightly increased — then the indicator was at the level of 29.7%. The share of mortgage loans with a down payment below 20% is 43.2%, more than or equal to 20% — 56.7%. At the beginning of the year, this ratio was 45.1% and 54.8%, respectively.

Rosbank Dom estimated the average down payment on a mortgage at 37%, and the share of mortgage loans below 20% was called insignificant. “We do not expect a significant change in the value of the average PV due to a change in the regulator,” said the chief analyst of the Mortgage Products Department at Rosbank Dom. At the same time, the expert allowed a slight slowdown in the growth rate of the volume of mortgage loans issued relative to the first and second quarters of 2023.

Banks will begin to more objectively assess the solvency of borrowers, thereby reducing the risk of loan defaultshe explained.

IN VTB are more optimistic.

Despite the changed approach to mortgage regulation this year, the home loan market will continue to grow dynamicallythe bank said.

According to VTB, in the first half of the year, Russians will take out a mortgage for more than 2.76 trillion rubles, which is 2% higher than the result of the record year 2021. Thus, the mortgage segment in Russia will fully recover. A significant contribution to the dynamics of the market was made by state programs, according to which 40% of transactions are now carried out, they added.

source: RBC Real Estate

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