Developer subsidised mortgages: risks and possible regulatory measures
Subsidised mortgage lending programmes offered by developers at extraordinary low interest rates (as low as 0.01% p.a.) may involve risks for both borrowers and banks, and the financial system in general, according to the consultation paper prepared by the Bank of Russia. Therefore, this may entail the application of additional measures to regulate such mortgage programmes.
On the face of it, the developer subsidised mortgages seem beneficial for citizens due to lower monthly payments. However, the price of purchased property turns out to be substantially exaggerated. When forced to sell an apartment (for example, in case of a loss of income or after relocation), individuals will be hardly able to do so without a loss, i.e. the amount of proceeds may not be enough to repay the loan. Moreover, it will be more expensive for a borrower to pre-repay this loan than a conventional mortgage. A number of banks, in turn, may underestimate interest and credit risks. Furthermore, artificially high prices may confuse the entire market.
The Bank of Russia intends to limit the spread of such lending schemes. Work is underway to introduce higher macroprudential buffers for these loans, and also to increase the rate of provisioning if the effective rate is below market levels.
The Bank of Russia welcomes comments and proposals to the report through 31 October 2022.