Editor's note: This is the first of two articles on buying property in Russia.
Expats who see one of the perks of living in Russia as being able to escape dinner party conversations about property prices are increasingly disappointed. With the price of the average Moscow apartment rising last year by nearly 40 percent, more and more expats are getting acquainted with Russia's mortgage market.
The mortgage providers range from mutual-type credit unions, through special schemes set up by some regional administrations, to Russian and Western banks.
Several ZhSSs, or house-building and savings societies, exist where people save and after some time get a loan to buy a house. These are unlikely to be of interest to expats or higher-earning Russians as the available loans are typically very small, short-term, and most suffer the disadvantage that you do not own the house until full repayment of the mortgage.
The Russian banks generally offer dollar loan to property value amounts of 70 to 85 percent at rates typically of 5 to 10 percent. They may be of some interest to expats, although their loan periods rarely exceed 10 years, which very significantly increases the monthly repayment costs.
In the mainstream mortgage market the two leaders -- certainly as far as expats are concerned -- are DeltaCredit Mortgage Bank, set up by the U.S.-Russia Investment Fund in 1999, and Austria's Raiffeisen Bank, which entered the market in 2002.
These banks are devoting a lot of attention to product development, generally offer more flexible terms and are prepared, to some extent, to tailor loans for larger mortgages -- often a useful facility for expats.
DeltaCredit's basic product is a 10- or 15-year dollar mortgage with a maximum 85 percent loan to value. There is a choice of either a fixed interest rate of 12 percent or a variable rate based on LIBOR -- the international interbank lending rate. This currently works out at 10 percent. They offer loans from $10,000 to $500,000, and require only the property as collateral.
Raiffeisen provides mortgages from $20,000 to $400,000, but does provide much larger loans for particularly credit-worthy clients. Currently, their standard terms are either a LIBOR plus 8 percent variable rate over 10 years (currently working out at 10 percent) or a 12 percent fixed rate. The bank does not include their fees into the cost of the insurance cover, which can save up to 15 percent on the insurance costs. Raiffeisen also only requires the property as collateral.
For people who want to buy a new property, Raiffeisen provides mortgages during construction (currently at 14 percent). DeltaCredit currently lends only on existing apartments, but it plans to launch new products in the near future to replace its former popular loan schemes for investment in Moscow region cottages and properties bought as investments.
DeltaCredit's mortgages cover apartments in Moscow, St. Petersburg and Nizhny Novgorod, while Raiffeisen provides mortgages for both apartments and cottages in Moscow, the Moscow region and St. Petersburg.
Newcomers to the market are Troika-Rosgosstrakh, about to launch a new product, and France's Soci?t? G?n?rale, which has a loan facility from the European Bank for Reconstruction and Development plus additional resources.
ING and Citibank are also said to be developing mortgage plans, and there are reports of yet more Western and Russian players planning to enter the market.
Mortgage rates are likely to fall, perhaps to 8 percent in the next 3 to 5 years, maybe even lower. But don't forget that in the short term they could go up in the event of some unexpected economic development or political shock, and you should satisfy yourself that in such circumstances your cash flow would permit you to service higher monthly repayment costs. A fixed-rate mortgage removes at least the risk of a rate rise, although you will not benefit from any future falls in interest rates.
For expats, who often enjoy greater opportunities for international investment, it is possible to secure even lower monthly costs using an interest-only mortgage linked to an offshore savings vehicle to repay the capital. DeltaCredit and Raiffeisen will only consider such schemes on a case-by-case basis, so anyone interested in such possibilities would be better to take independent advice first.
Don't overlook the hidden extras -- arrangement fees, commissions and insurance premiums -- which can add significantly to your monthly costs. Make sure that you understand fully all these charges, and you should also be able to calculate the annualized percentage rate, or APR, that you are really paying when these additional charges are taken into the calculation.
Mortgage underwriting is stricter in Russia than in most Western countries, and if applicants reside in Russia, they will definitely have to pay taxes. Raiffeisen and DeltaCredit will both consider loans for nonresidents, but if you are an expat or Russian living and working in Russia, then you must be paying Russian taxes -- and they will require proof of this.
The good news is that as a local taxpayer, you qualify for mortgage tax relief. The relief allows you to deduct full interest payments and up to 600,000 rubles (about $19,000) in capital payments from your personal income for tax purposes. This is very generous by most Western standards.
The situation for expats in providing evidence of income and stability of that income is easier than for Russians -- some banks will even lend to expats with unearned income, such as from residential letting, and will usually take account of non-Russian source income. But be prepared to have to divulge pretty fully your financial affairs. Also note that generally the banks don't provide mortgages that extend beyond the borrower's 60th birthday for men and 55th birthday for women, although Raiffeisen will lend to older people in certain circumstances.
Another important issue to consider is your future plans. Can you repay early, make partial redemptions, accelerate repayments, take repayment holidays and take further advances? Many of these facilities are not yet available in Russia, but they are coming. Meanwhile, be especially aware of exit penalties for early repayment. Some banks do have schemes allowing early repayment -- Raiffeisen is particularly good in this regard.
As an alternative to a Russian mortgage, it is well worth considering remortgaging a property back home to release cash for a purchase in Russia. Some banks will consider loans secured on an investment portfolio or some other asset for property purchase in Russia.
Several large Western banks run offshore specialist subsidiaries that target expats and high-net-worth locals for residential mortgages in various Western countries. These banks do not lend on security in Russia, but they will consider lending (and remortgaging) on suitable security somewhere in the West. This mortgage could be used to release funds for a cash purchase in Russia or to combine with whatever size of mortgage you can secure here. There are several international financial advisers who specialize in placing such mortgages.
Douglas Prentice is an independent broker specializing in real estate, personal finance and financial planning.
Expats who see one of the perks of living in Russia as being able to escape dinner party conversations about property prices are increasingly disappointed. With the price of the average Moscow apartment rising last year by nearly 40 percent, more and more expats are getting acquainted with Russia's mortgage market.
The mortgage providers range from mutual-type credit unions, through special schemes set up by some regional administrations, to Russian and Western banks.
Several ZhSSs, or house-building and savings societies, exist where people save and after some time get a loan to buy a house. These are unlikely to be of interest to expats or higher-earning Russians as the available loans are typically very small, short-term, and most suffer the disadvantage that you do not own the house until full repayment of the mortgage.
The Russian banks generally offer dollar loan to property value amounts of 70 to 85 percent at rates typically of 5 to 10 percent. They may be of some interest to expats, although their loan periods rarely exceed 10 years, which very significantly increases the monthly repayment costs.
In the mainstream mortgage market the two leaders -- certainly as far as expats are concerned -- are DeltaCredit Mortgage Bank, set up by the U.S.-Russia Investment Fund in 1999, and Austria's Raiffeisen Bank, which entered the market in 2002.
These banks are devoting a lot of attention to product development, generally offer more flexible terms and are prepared, to some extent, to tailor loans for larger mortgages -- often a useful facility for expats.
DeltaCredit's basic product is a 10- or 15-year dollar mortgage with a maximum 85 percent loan to value. There is a choice of either a fixed interest rate of 12 percent or a variable rate based on LIBOR -- the international interbank lending rate. This currently works out at 10 percent. They offer loans from $10,000 to $500,000, and require only the property as collateral.
Raiffeisen provides mortgages from $20,000 to $400,000, but does provide much larger loans for particularly credit-worthy clients. Currently, their standard terms are either a LIBOR plus 8 percent variable rate over 10 years (currently working out at 10 percent) or a 12 percent fixed rate. The bank does not include their fees into the cost of the insurance cover, which can save up to 15 percent on the insurance costs. Raiffeisen also only requires the property as collateral.
For people who want to buy a new property, Raiffeisen provides mortgages during construction (currently at 14 percent). DeltaCredit currently lends only on existing apartments, but it plans to launch new products in the near future to replace its former popular loan schemes for investment in Moscow region cottages and properties bought as investments.
DeltaCredit's mortgages cover apartments in Moscow, St. Petersburg and Nizhny Novgorod, while Raiffeisen provides mortgages for both apartments and cottages in Moscow, the Moscow region and St. Petersburg.
Newcomers to the market are Troika-Rosgosstrakh, about to launch a new product, and France's Soci?t? G?n?rale, which has a loan facility from the European Bank for Reconstruction and Development plus additional resources.
ING and Citibank are also said to be developing mortgage plans, and there are reports of yet more Western and Russian players planning to enter the market.
Mortgage rates are likely to fall, perhaps to 8 percent in the next 3 to 5 years, maybe even lower. But don't forget that in the short term they could go up in the event of some unexpected economic development or political shock, and you should satisfy yourself that in such circumstances your cash flow would permit you to service higher monthly repayment costs. A fixed-rate mortgage removes at least the risk of a rate rise, although you will not benefit from any future falls in interest rates.
For expats, who often enjoy greater opportunities for international investment, it is possible to secure even lower monthly costs using an interest-only mortgage linked to an offshore savings vehicle to repay the capital. DeltaCredit and Raiffeisen will only consider such schemes on a case-by-case basis, so anyone interested in such possibilities would be better to take independent advice first.
Don't overlook the hidden extras -- arrangement fees, commissions and insurance premiums -- which can add significantly to your monthly costs. Make sure that you understand fully all these charges, and you should also be able to calculate the annualized percentage rate, or APR, that you are really paying when these additional charges are taken into the calculation.
Mortgage underwriting is stricter in Russia than in most Western countries, and if applicants reside in Russia, they will definitely have to pay taxes. Raiffeisen and DeltaCredit will both consider loans for nonresidents, but if you are an expat or Russian living and working in Russia, then you must be paying Russian taxes -- and they will require proof of this.
The good news is that as a local taxpayer, you qualify for mortgage tax relief. The relief allows you to deduct full interest payments and up to 600,000 rubles (about $19,000) in capital payments from your personal income for tax purposes. This is very generous by most Western standards.
The situation for expats in providing evidence of income and stability of that income is easier than for Russians -- some banks will even lend to expats with unearned income, such as from residential letting, and will usually take account of non-Russian source income. But be prepared to have to divulge pretty fully your financial affairs. Also note that generally the banks don't provide mortgages that extend beyond the borrower's 60th birthday for men and 55th birthday for women, although Raiffeisen will lend to older people in certain circumstances.
Another important issue to consider is your future plans. Can you repay early, make partial redemptions, accelerate repayments, take repayment holidays and take further advances? Many of these facilities are not yet available in Russia, but they are coming. Meanwhile, be especially aware of exit penalties for early repayment. Some banks do have schemes allowing early repayment -- Raiffeisen is particularly good in this regard.
As an alternative to a Russian mortgage, it is well worth considering remortgaging a property back home to release cash for a purchase in Russia. Some banks will consider loans secured on an investment portfolio or some other asset for property purchase in Russia.
Several large Western banks run offshore specialist subsidiaries that target expats and high-net-worth locals for residential mortgages in various Western countries. These banks do not lend on security in Russia, but they will consider lending (and remortgaging) on suitable security somewhere in the West. This mortgage could be used to release funds for a cash purchase in Russia or to combine with whatever size of mortgage you can secure here. There are several international financial advisers who specialize in placing such mortgages.
Douglas Prentice is an independent broker specializing in real estate, personal finance and financial planning.
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