Raising the Central Bank rate: what will happen to the mortgage

Recommendation points

• What borrowers can expect. Will the mortgage rate change
• Delay in mortgage payments. How to be
• How to negotiate with the bank
• Refinancing a mortgage agreement
• Restructuring a mortgage into ruble currency
• Can the bank raise the mortgage interest rate
• What will the government do
• What about mortgage payments? Is there any hope for the best

The collapse of the ruble and a sharp increase in the Central Bank’s discount rate caused panic among Russians who have already taken out a mortgage or are going to do it in the near future. Let’s see how the increase in the Central Bank rate will affect them, how to agree with the bank on preferential terms and what to expect for mortgage borrowers in the future.

What borrowers can expect. Will the mortgage rate change

Raising the refinancing rate to 17% means that it is at this rate that commercial banks will borrow money from the Central Bank. If you look at the dynamics over the past year, you can see that even with a constant increase in the refinancing rate, the interest rates on the ruble mortgage have not changed much:

• March 2014: Central Bank rate – 7.0%, mortgage – 12%;
• April 2014: Central Bank rate – 7.5%, mortgage – 12.3%;
• July 2014: Central Bank rate – 8.0%, mortgage – 12.2%;
• September 2014: discount rate – 9.5%, mortgage – 12.5%.

But the current sharp increase will radically change the situation. Banks cannot operate without profit. Therefore, they will be forced to issue loans at interest rates exceeding the Central Bank rate. It is expected that at the current refinancing rate for mortgage loans, Russians will pay no less than 18-20% per annum. And this is according to the most optimistic forecasts. Surely small banks will offer mortgages to borrowers at even higher interest rates.

Social mortgages should rise in price much less. According to Andrey Shelkovy, Director of the Housing Construction Financing Agency, the social mortgage rate in 2015 will be calculated based on the consumer inflation index, to which 3.8% percent will be added. Next year, the Ministry of Economic Development predicts the consumer inflation index in the region of 7.5%. Accordingly, the rate of loans for the purchase of housing under state programs should be just over 11%.

But all these changes should be expected only after the New Year. At the moment, a number of commercial banks have suspended the implementation of mortgage programs and so far do not even issue pre-approved loans. Financial institutions want to wait some time to see where the current situation with the ruble will lead, what steps the government will take and what interest rate will be optimal in the changed economic conditions.

Delay in mortgage payments. How to be

For the first 20-25 days after the delay in payment, the bank may not pay attention to the delay in payments. Its employees are well aware that absolutely everyone can have temporary financial difficulties. But if the client does not make payments further, the specialists of the credit department begin to try to get in touch with him, send notifications of late payments and try in every possible way to remind the borrower of his obligations.

If mortgage payments are not carried out within three months or the payment terms have been violated more than three times within 12 months, and the delay exceeds 5% of the mortgage amount, the bank’s lawyers have the right to go to court to collect the debt. And, of course, the court decision will be in their favor; it is unlikely that a client hiding from a financial institution can count on the court to side with him..

Further, in order to recover from a bank client the amount of debt, interest and penalties for delay, bailiffs can seize the debtor’s bank account, auction off mortgage real estate, and seize his car. If the mortgage is issued not only for the borrower, but also for his relatives, their property may also be arrested.

There are even known cases when collection agencies, which bought out debts from banks, threatened insolvent borrowers with a criminal case for fraud. But such threats are absolutely hopeless. Article 159 of the Criminal Code of the Russian Federation (fraud) can be applied only if the bank’s client used fake documents when applying for a mortgage. True, in the Russian Criminal Code there are 177 more articles (evasion of repayment of accounts payable), but there have been no precedents when borrowers were tried under this article..

How to negotiate with the bank

As is already clear, for an insolvent borrower, hiding from the bank is absolutely useless. Your best bet is to try to negotiate with a financial institution to ease the terms of your mortgage agreement. After all, the bank is absolutely not interested in problem borrowers and will certainly meet halfway if the client behaves reasonably and adequately.

You need to take a certificate from the bank about the amount of your debt. Then you should write an application to the financial institution listing the reasons why it is not possible to make payments on the mortgage in full. In the letter, it is worth not only asking the bank for preferential conditions, but also indicate your proposals for resolving the situation.

The most common options for easing mortgage conditions are refinancing and restructuring into ruble currency.

Refinancing a mortgage agreement

When refinancing, a new loan is opened to the borrower, at the expense of which the old one is repaid. A new loan, as a rule, is issued at the same interest rate as before, but for a longer period, due to which the amount of monthly payments is reduced. This is the most acceptable option for borrowers who have taken out a mortgage in rubles.

Restructuring a mortgage into ruble currency

In the face of a rapidly rising dollar, Russians who have taken out foreign currency mortgages are best off asking financial institutions to restructure their mortgage loans into the national currency. That is, the terms of the agreement will remain the same, but mortgage payments will be paid in rubles.

Then the letter goes to the bank (you need to make sure that it is properly registered) or sent to the financial institution by letter with notification.

During the bank’s consideration of the application, in no case should the payments be stopped, otherwise, in the event of legal proceedings, the borrower may be recognized as a malicious defaulter. If it is not possible to transfer the full amount of mortgage payments to the bank, you can limit yourself to only part of it, but pay it regularly within the terms set by the contract.

Can the bank raise the mortgage interest rate

To understand this, the borrower must carefully re-read the mortgage agreement. Worst of all, it states that a financial institution can raise the interest rate unilaterally. In this case, the borrower can only complain about his own inattention, when he did not pay attention to this item when concluding the agreement.

Also, in the terms of the agreement, it may be said that a financial institution has the right to raise the rate only upon the occurrence of certain conditions. For example, an increase in the Central Bank’s discount rate, or the LIBOR index. It is necessary to check whether such conditions really have occurred and if so, then the increase in the rate by the bank is absolutely legal.

Another common option is when the mortgage agreement states that the rate can be increased only by mutual agreement of the parties. In this case, the borrower only needs to write a letter to the bank stating that he did not give his consent to the rate increase. If the financial institution persists, you can safely go to court. The borrower has every reason to win it.

In theory, it is possible that a financial institution go to court with a request to change the terms of the mortgage agreement on the basis of Article 451 of the Civil Code of the Russian Federation. It states that the contract can be changed by court order in cases where the circumstances have changed so much that if the parties to the contract had the opportunity to foresee this, they would have entered into an agreement on significantly different terms. True, in the same article 451 it is said that a change in the terms of the contract by a court decision in connection with significantly changed circumstances can take place only in exceptional cases. And in Russian judicial practice, the number of such precedents is very small..

But even if such a claim is filed by a financial institution, the bank will first need to prove why it could not foresee the change in circumstances, and the borrower will pay at the old rates until the court decides to change them..

What will the government do

In the current confusion with mortgage rates and the ruble exchange rate, one thing is clear: if the rate is 20% or higher, and the ruble exchange rate remains at the current level, the number of people wishing to get a mortgage in Russian banks (even in rubles, at least in foreign currency) will decrease tenfold. Already, many experts predict the death of the Russian mortgage, at the current rate of the Central Bank.

Construction companies will be hit no less. According to the Minister of Construction and Housing and Communal Services Mikhail Me, every third apartment in Russia is bought under mortgage programs. As a rule, these are housing in new buildings, and after the massive refusal of Russians from mortgages, many developers may simply not find the money to complete the projects already started. If earlier it was simply dangerous to buy an apartment at the zero stage, now it will become a real “lethal number”.

It is clear that the government must take some steps to stabilize the situation. Let’s see what options exist for a way out of the situation based on the latest statements by Russian officials.

At a traditional press conference following the results of the year, Vladimir Putin said that the Russian authorities are well aware that the development of mortgages at the current rate of the Central Bank is very difficult and may even be impossible. Therefore, the government will provide subsidies to banks to support mortgage programs. That is, banks will not raise rates, and losses incurred will be reimbursed from the budget..

True, the president did not specify what the size of these subsidies will be and what types of mortgage programs will enjoy state support. Surely, if the government takes any measures, it will only be in relation to certain categories of borrowers. It is simply unrealistic to subsidize all mortgage programs in Russia in the current crisis situation and the planned budget deficit for the next few years..

As for people paying foreign currency mortgages, their situation is even more deplorable. In addition to the risk of raising the interest rate, they are already forced to pay twice as much on their loans due to the collapsed ruble exchange rate. The number of such borrowers in Russia, according to various estimates, ranges from 25 to 150 thousand. They hope that the authorities will help them according to the Hungarian scenario: that is, they will pay the mortgage at the current dollar rate, but with a significant discount, and the difference in the rate will be paid to banks from the budget.

So far, Russian officials have not made any statements about the possibility of such a scenario. According to State Duma deputy Anatoly Aksakov, the possibility of reviving the Agency for the Restructuring of Housing Mortgage Loans, which had already helped borrowers in the previous crisis, is now being considered. But, according to him, only those foreign currency borrowers who could not pay off the banks as a result of refinancing can use the services of this organization..

Also, a number of deputies from Fair Russia asked the chairman of the Central Bank Elvira Nabiullina to oblige commercial banks to restructure foreign currency loans of Russians and convert payments on them into rubles at the exchange rate as of the date of the contracts, but no later than January 1, 2014. How the Central Bank chairman will react to this request is not yet known.

What about mortgage payments? Is there any hope for the best

The current increase in the discount rate was introduced in order to stop speculation in the foreign exchange market, when banks took loans from the Central Bank at low interest rates and with this money played for a fall in the foreign exchange market, which led to an even greater fall of the ruble. Most economists agree that this measure is temporary and it is unlikely that such a high discount rate will remain until the end of next year. After all, high interest rates on loans for a long time will have an extremely negative impact on all business projects being implemented in Russia, and may lead to a reduction in production and a worsening of the economic situation in the country..

Therefore, for people who until recently planned to take out a mortgage, it is better not to settle for the current high rates, but to wait six months or a year. It is possible that the mortgage situation will stabilize during this time..