The main pros and cons of a mortgage: what is important to know

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Assessing the advantages and disadvantages of mortgage lending is the most important step towards making a decision - to take or not to take a mortgage loan. Unfortunately, along with the obvious advantages, there are also disadvantages of a mortgage that should not be forgotten. Having the most complete picture of the positive and negative aspects of purchasing real estate with a mortgage loan allows the potential borrower to make the right decision for himself.

What is a mortgage

Everyone has heard the word “mortgage,” but only a few know what it really means. There are many myths around mortgage lending today. Some are afraid of high interest rates, others that the bank will take away their housing and leave them without a means of subsistence, and this list can be continued indefinitely. Therefore, we decided to understand the following questions: “What is a mortgage and how justified are these risks?”

You can get a mortgage at almost any banking institution in Russia. Mortgage loan – provided by the bank for the purchase of real estate on the primary or secondary market. The purchased property becomes collateral and guarantor of loan repayment. You can get a mortgage for a period from 10 to 30 years. The interest rate for purchasing your own real estate on the Russian lending market ranges from 8.5% to 15 and depends on the banking institution.

Advantages and disadvantages

Before examining the advantages and disadvantages of this type of lending, it should be noted: there is no clear division into “good” and “bad”. For citizens with a small but stable income, a mortgage will literally be their salvation; for the wealthier, on the contrary, it will be an unnecessary overpayment to the bank. In some cases, it is even more profitable to turn to shared acquisition of real estate under construction.

Therefore, to begin with, anyone who is thinking about a mortgage needs to think hard: for what purpose does he want to purchase real estate? Is he ready to overpay large sums to the bank? And finally, is a mortgage suitable for the specific situation of the borrower? Depending on this, it is determined whether a mortgage is profitable or not.

Bankers' requirements for borrowers

The loan amount for the purchase of residential real estate is quite large, so banks do not want to take risks and put forward the following requirements to their potential borrowers:

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1. Having a constant confirmed income for the last 6 months. If your salary is not enough to obtain a loan, you will need financial guarantee from third parties.
2. Positive credit history.
3. No overdue loan debts.
4. Work experience in the last place of work must be at least 1 year.

When not to take

If there is no rent that requires a significant percentage of monthly income, and if monthly income exceeds 1,500 usd, it is better to simply save the free money. Conversion into foreign currency or storage on deposit will do - both will save them from inflation (just keep in mind that the deposit will not save them from a possible fall of the Russian ruble). Over time, enough money will be collected to buy real estate outright or take out a mortgage with a down payment of 50-70% of the cost of housing.

If there is no confidence in the future - for example, the borrower's employer has laid off staff - taking out a mortgage is not only pointless, but also dangerous. If you lose your job and are unable to find a new one, the case may end in litigation.

The reason why you can’t take out a rash large loan is because of the obligations: the signed loan agreement greatly limits your freedom of action. After signing the contract, you can no longer change places of work frequently and take a “vacation” for a month or two; any late payment spoils your credit history and affects your finances - the contract specifies fines and penalties for late payment. The same goes for the monthly payment: if you miscalculate your strengths and set the monthly payment too high, the next five to seven years can turn into an extremely tiring race.

Pros of a mortgage

1. Opportunity to improve your living conditions. By taking out a mortgage, you will be paying your hard-earned money for your own apartment, and not providing a bright future for strangers in whom you previously had to rent housing.
2. Investments. When buying good or luxury real estate, you can be sure that over time its value will increase several times.
3. Purity of the transaction. Bank employees carefully check all real estate documents. You will never be given permission to buy a distressed property.

pros

• If you took out a mortgage on an apartment, it is now your property. Yes, an encumbrance will be issued on the apartment in Rosreestr, so that in the event of a systematic violation of the loan agreement, the property will be taken over by the bank, but the situation “still needs to be started.” In most cases, the apartment remains the property of the borrowers. For many borrowers, this is the only way to get that “roof over their heads”;
• Sub-point of the previous one: since the apartment is your property, you have every right to rent it out (or its individual rooms), carry out redevelopment, and so on. Accordingly, a mortgage can be considered as a profitable investment if the borrower already owns some kind of real estate. The scheme is simple: an apartment purchased with a mortgage is rented out, and the payment to the bank is repaid with the same rental money. Over time, the borrower will get the apartment for next to nothing;
• The monthly payment can be adjusted. For couples who have very little income, the payment can be made so small that it will hardly be felt; for those with high incomes, the payment can be made very large in order to pay off the bank in a few years and not overpay a lot of money. You just need to take into account that the smaller the payment, the longer the payment period;
• Real estate becomes more expensive over time. This means that an apartment purchased today for 3 million rubles will cost 6 million rubles in ten years. Thus, the increasing cost of real estate almost completely covers the overpayment to the bank, and partially covers inflation;
• Finally, many young families do not have their own property. At the same time, you need to live somewhere, and the only way out of the situation is expensive rental housing: in Moscow and other megacities, rent can eat up up to 50% of a family’s monthly income. The most important thing is that the tenant does not own the apartment for the duration of the lease agreement, but only temporarily receives the right to use it. A mortgage costs about the same amount each month, but each payment is a small step towards full ownership of the property. Often, a young family simply has no other options other than turning to a collateral-based loan.

Cons of a mortgage

1. The main disadvantage of mortgage lending is the high overpayment , which can be avoided by paying a good down payment. Be careful when choosing a banking institution; if you choose a bank with a dubious reputation, you risk overpaying up to 100%.
2. High interest rate.
3. Additional costs : commission for processing the application, completing the necessary package of documents, as well as opening an account for transferring funds.

Advantages and disadvantages of loans

Consumer lending also has its positive and negative sides. And if you consider that the purpose of lending is investing in real estate, then you should think carefully about such a loan.

The procedure for obtaining a mortgage loan takes place in several stages:

1. We collect the necessary package of documents to apply for a mortgage. To save time, you can submit your application to several banking institutions at once
2. Credit experts, together with lawyers, will carefully check your documents. So don't try to fake them. Remember that many banks charge a fee for processing the application, and if they doubt the authenticity of your documents, you risk being refused and losing your money. The application review period ranges from 1-12 days.
3. After your application is approved, you can move on to the next stage - searching for housing. When you select a suitable option, you need to submit to the bank’s lawyers all available documentation for the property for study, as well as make an independent assessment of the market value of the property and provide the bank with a report. Verification of documents and real estate valuation reports lasts from 5 to 7 days.
4. Signing of documents.
5. We make payments monthly. If difficulties arise with payment, there is no need to hide from bank employees, but solve the problems that arise together with them. Today, banks are very loyal to their clients and help them find a way out of the most difficult financial situations.

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Additional costs for mortgages and loans

Unlike a mortgage, a consumer loan most often does not require additional costs, with the exception of voluntary life insurance, but you can always refuse it. But this will not work with a mortgage. Before choosing a mortgage, citing lower interest rates, calculate all additional costs; it may turn out that an overpayment of 2-3% for consumer lending will be incomparable in relation to the costs of an issued mortgage.

Get ready to spend money on services such as:

• mandatory insurance of collateral property, one’s health and life;
• when purchasing housing on the secondary market, title insurance is required (against possible loss of ownership of the apartment);
• an independent assessment of the acquired property becomes mandatory;
• preparing a package of documents for an apartment, as well as registering it in all registers, is also quite an expensive matter;
• if you cannot collect the documents yourself, you will have to spend money on a notary and a mortgage broker;
• In addition to interest, some banks charge a commission for considering your application and issuing a loan, which will also not be so small.

As a result, we strongly recommend that you consider all possible options when purchasing a home. You shouldn’t rush headlong into the pool if the bank promises low interest rates and no overpayments. Buying a home is a very important decision and a very expensive undertaking. To prevent it from becoming a lifelong problem, carefully consider every decision you make.

Is it possible to take out a mortgage on real estate on the secondary market?

Of course, there is such a possibility. Moreover, it is provided by almost all Russian banks - albeit on slightly different conditions from “new-build housing”.

However, this does not mean that borrowers have the opportunity to take out any secondary housing they like as a mortgage. Banks may refuse if there are good reasons for this :

1. In case the previous owner died less than six months ago.
2. If the apartment building with the purchased housing is worn out by more than 60%.
3. An application for a room in a communal apartment or dormitory may also be rejected, since if the borrower is unreliable, the bank will not be able to quickly sell such housing.
4. If one of the owners is a disabled person or a person from another group of the population protected by the state - disabled people, WWII veterans, and so on. The bank refuses because if it is necessary to sell an apartment, it is almost impossible to evict such tenants.
5. If the transaction occurs between relatives and the bank has serious suspicions regarding the validity of the transaction (the purchase and sale may be fictitious).

In other cases, the bank freely issues a mortgage loan for secondary housing.

Experts tell us when is the best time to take out a mortgage

Banks are recording a slowdown in mortgage issuance, despite rates being cut to near historic lows. When is the best time to buy a home on credit?

According to a study by the NKR rating agency, the number of new mortgage loans in the nine months of 2020 decreased by 5% compared to the same period last year. Banks have reduced the number of mortgage loans issued in 79 constituent entities of the Russian Federation, writes Banker.

Banks are trying to stimulate demand for mortgage loans by softening the conditions for issuing mortgages: increasing the maturity of loans and reducing interest rates. Since the beginning of November, mortgage rates have been reduced by more than ten major players.

Since the beginning of the year, the market average rates on mortgage loans have dropped by 1-1.25 percentage points. According to the Central Bank of the Russian Federation, the weighted average rate on loans issued during the month amounted to 9.63% as of October 1.

NKR analysts predict a decrease in the average rate on new mortgage loans to 8.5% by the end of 2020. Increasing competition will push banks to lower rates.

Mortgage loan rates will continue to fall, says market expert Ekaterina Shchurikhina. By the end of the year, mortgage rates may be reduced by 0.25-0.5 percentage points from current levels.

Towards the end of November - in December, a number of banks will offer promotional mortgage products with a reduced rate in order to increase issuance against the backdrop of a seasonal increase in demand.

According to experts, now is the best time to take out a mortgage or refinance an existing mortgage loan.

“From the point of view of lending conditions, the fourth quarter of 2020 is favorable for obtaining a mortgage. It is during this period that banks offer pre-New Year promotions in order to fulfill plans as fully as possible,” notes Vadim Pakhalenko, director of the mortgage lending directorate at TKB.

“As a rule, the fourth quarter is the best time to buy an apartment, since the ratio of real estate prices and interest rates is the most favorable,” says Nina Kryuchkova, deputy director of the lending business department at Otkritie Bank.

Real estate agencies believe that it makes sense for buyers to wait for a reduction in mortgage rates for a few more weeks, in addition to receiving a New Year's discount.

“In my opinion, you shouldn’t put off a mortgage deal for too long. At any moment, the downward trend in rates may reverse,” warns managing partner Maria Litinetskaya. New sanctions and an intensification of the economic crisis are possible.

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