Get a Mortgage!
Those of us who have bought property ‘in the West’ – a term that sounds more and more out-of-date – are used to lawyers handling the buying-selling procedure. We go to an estate agent, fill out a form, go to a mortgage bank, fill out another form, and as long as we have the right income level, it’s all more or all taken care of. We are free to choose a property, haggle over the price, or sell our existing property. Things can and do go wrong, especially if there is a chain involved; but estate agents and lawyers can take a lot of the strain off the process. Here, things are different. Mortgages are only now just beginning to become acceptable in the Russia community, and the foreign community has also been slow to join the bandwagon. One obvious reason for this has been the cost. A few years ago rates were up at 15%, it was far cheaper for many to borrow abroad at 5% or 6%, particularly if they could simply draw equity out of existing properties. Now rates have come down to 11% or 12%, and uncertainty has crept into housing markets in much of Europe, and recently the United States, meaning that it isn’t so safe to withdraw equity. Perhaps it is time to consider a mortgage. The only thing that will bring rates down here is competition, owing to the fact that securitization of the mortgage market does not really exist here, thus there is no direct link to Central Bank rates. One can presume that rates will come down further, but this is open to debate.
One should not forget that it is only over the past few years that the confidence level in the Russian banking system has been such as to support the institution of mortgages. In the past, legal obstacles protecting default mortgagees have made it almost impossible for mortgagers to protect their assets; i.e., it was impossible for a bank to evict a bad payer. The market really only started moving since new legislation was passed in December 2004 giving mortgagers a stronger hand. Many expats do not think that they qualify for a mortgage. However all the main banks, such as IMB, Delta Credit, Raiffeisen, Societe General, Vneshtorgbank, MDM, do offer mortgages to foreigners. The same basic qualification exist here as any where else in the world, no matter who you are. Having or not having a work permit and temporary residency is not the main factor – it helps – but the biggest issue is whether an individual is creditworthy or not. Having said that, the criteria used to assess income here are more flexible than in most countries. Asking some expats to prove that they are in receipt of a steady income, is perhaps the same as asking them to walk in a straight line across the deck of a ship in a rocky sea. Loan to equity value is pretty low here as yet (about 70:30), and a repeat of the 1998 crisis is not on the immediate horizon. We should not forget that even after ‘the crisis’ (bad for everybody except those who bought at that time), residential property prices bounded back in only two and a half years, according to David Gilmartin,Managing Director of Intermark. Lawyers’ firm Hellevig, Klein & Usov declined from naming its clients, but said that there are plenty of foreigners currently purchasing both for investment purposes and for personal accommodation.
The third question is – is it worth it? Wouldn’t it be better to buy in cash? The Russian word for real estate – nedvizhimost – means something that does not move. Real estate is an asset that works over the medium and long term, not the short term. However, real estate in Russia has done anything but stand sill. According to Nuri Katz, managing Director of Beatrix Relocation Services, prices have grown consistently over the past few years. The figures are impressive: 27% in 2002, 32% in 2003, 24% in 2004 and 32% in 2005. David Gilmartin confirmed that mortgage payments are tax-deductible; that can make quite a difference. Inflation works traditionally in the mortgagees’ favour.
Now that mortgages are becoming available to finance construction or redevelopment of properties in the Moscow Oblast, and equity can be taken out of existing properties, the market is opening up for the amateur property developer lurking deep in the material soul of all of us. Buying, redecorating, selling, leasing, releasing equity are all basic building bricks of any capitalist country, and have kept consumerism afloat for decades in other places. Why shouldn’t the same thing happen here? Could the Russian government have caught onto the fact that property ownership makes economic sense?
Words of Warning
Before you sign on the dotted line for your mortgage, there are a couple of things you might want to consider. Daniel Klein from Hellevig, Klein & Usov pointed out that it is now possible to get a home-equity loan after you have bought your property. The Moscow market is a sellers market. This means that a seller who don’t like the look of you – your nose is too long, you don’t speak proper, or you haven’t got cash in a plastic bag ready to hand over to Boris waiting by the door, will probably turn you down in favor of somebody with readies ready to spin in a bank-note counting machine. This is beginning to change, but slowly, particularly when purchasing a property on the secondary market.
To offer a mortgage, a bank will need to make a series of standard checks, and this may spin the process out to a couple of weeks or even a couple of months. There may be restrictions on the kind of property you can buy – for example Raiffeisen bank will not lend if a flat is in a building with wooden beams between floors and roofs. Most of the old, central part of Moscow falls under this category. Delta Credit will not lend if the property is to be demolished within 5 years, but apart from that, is not too fussy.
If you decide to finance the property without a mortgage, that means you will have to do a lot of the paperwork yourself. Unless you are an expert, it is advisable to use lawyers to basically do due diligence. In this case, this means checking out the title to the property, and making sure that the seller does own the place in the first place. You may have difficulty getting an equity loan if it turns out that the owner is a respected gentleman living in his dacha and knows nothing of his flat having been sold. The lawyers have to check for ‘dead souls’ as well. These are creatures that only come out some time after purchase, usually in the form of long lost relatives or family members who have ‘propiska’ (residency rights) in the property. Making sure the flat is ‘clean’ can take you a long time. An expert can do the job in a couple of weeks. The seller will demand the standard 5%, a deposit which theoretically is returnable if it is discovered that there are problems with the title or occupation documents. In practice, getting the deposit back may be difficult. Possession is nine tenths of the law in Russia, and it might be very difficult and very expensive to try to get the deposit back through the courts.
Despite these dangers, the actual cases of deals going wrong, when proper due diligence has been carried out, are relatively few. Bearing in mind that it can take months to complete a deal in the UK for example, the few weeks that it takes here; although highblood pressure times, especially for the buyer, are soon over. In the end of the day, working with professionals is not compulsory here, as in other countries, but it does make to fewer grey hairs.
Since there are a growing number of banks offering mortgages, it may be simpler and easier to work with a mortgage broker. This is a new industry in Russia but there are now many players. We will be covering this in a few months.