Mortgages: Both Sides of the Medal 2 © Dmitry Leus

Part 1

Decades, not years

When taking the decision to apply for a mortgage, the first thing to assess is one’s own financial strength. A maximum of prudence should be used, as mortgages are serviced over decades.

However, according to the Head of Mortgage and Consumer Lending at SMP Bank, Natalia Konyakhina, the loan’s term can be determined by the borrower himself. “Basically, people take out a mortgage for 10 to 15 years and repay within 5 to 7 years”, she says. “The longer the term, the greater the interest premium paid to the bank, warns Dmitry Leus from . “If income allows it, I advise early mortgage repayment”.

When making a decision about buying a property with a mortgage, it is important not to be frightened. In fact, for most people mortgages are the only way to turn into home owners, without having to save up for years (and see these savings finally eroded by inflation). According to DmitryLeus, mortgages are a time-tested, relatively comfortable, streamlined, and affordable tool to solve the housing question.

On the other hand, it would be misguided to take mortgages lightly. Repayment is mandatory and must be made on a regular basis, unless your home be repossessed. Accordingly, it is necessary to calculate what portion of family income can comfortably be spent on repayment - without living on bread and water.

What it takes

While deciding on a mortgage, it is not only the borrower who assesses his financial capacities. So does the bank...

“The borrower must have a stable job”, argues Natalia Konyakhina. It is a good sign if the borrower already owns an apartment, a secondary residence, a car, or any other assets of value. Equally important is a positive credit history”.

“An official proof of income is an icebreaker for most banks”, says Dmitry Leus. “However, even the existence of historical income figures as, for example, evidenced in an applicant’s official tax declaration, cannot guarantee that such income will always be available over the mortgage’s life”. Therefore banks are more and more often using internal questionnaires to document the income history of their potential clients. As a consequence, interest rates may be slightly higher.

The average borrower’s age is between 27 and 45, but the range may be wider. “Our applicants tend to be between 21 and 60 years old”, says Dmitry Leus.

Better not bet

Another important aspect worth consideration is the loan currency. “It is better to take out a mortgage in the currency of the borrower’s income, in order to avoid increased mortgage costs due to exchange rate fluctuations”, says Natalya Konyakhina.

“For borrowers with income in Russian roubles, the mortgage should, of course, only be taken in roubles”, agrees Sergey Arzyantsev. “It is nonsense to take a mortgage loan denominated in dollars/euros, thereby entering into a bet on whether the dollar/euro currency pair will weaken against the rouble”. “If the borrower's main income is in roubles, the mortgage should definitely be in roubles too”, confirms Dmitry Leus from . “This will at least help avoid taking an unnecessary currency risk”. According to Dmitry Leus, it is important not to be naive about floating rate mortgage proposals, which are normally linked to such instruments as the MosPrime (Moscow Prime Offered Rate), or the Libor (London Interbank Offered Rate), or to the Central Bank’s own refinancing rate“. I am very cautious with regard to this option”, says Dmitry Leus. “Interest rates can only go up right now and, in general, when it comes to mortgages, exchange rate uncertainty is an undesirable additional burden for the borrower”.

On the other hand, by making a simple calculation, one can see that floating rate offers can look quite attractive. For example, one bank offers 9.75% for the first five years, and 4.5% above MosPrime (today at 6.64%) during the remaining years.