Bank of Russia raises macroprudential requirements for mortgage loans

The Bank of Russia Board of Directors decided to raise risk-weight add-ons for mortgage loans issued from 1 August 2021.

In making its decision on risk-weight add-ons, the Bank of Russia Board of Directors was guided by the following.

Since mid-2020, the growth in residential real estate prices has significantly accelerated, which considerably exceeded the increase in household income. According to the data for 2021 Q1, the growth in prices for residential real estate in the Russian Federation as a whole was 13.6% in the secondary market in annualised terms, and 17.6%¹ in the primary market. In some regions, the price increase exceeded 20% over 12 months. In this situation, the importance of the size of mortgage down payments has increased, because these payments reflect the degree of loan collateral² and represent one of the key risk factors in mortgage lending. The degree of loan collateral limits banks’ risks associated with a possible adjustment of prices for residential real estate. Additionally, the down payment correlates with the frequency of defaults on loans and characterises borrowers’ solvency.

Banks gradually increase the proportion of mortgage loans with a low down payment (below 20%). This is especially typical of the primary mortgage market, which is in part linked to the conditions of preferential government mortgage lending programmes with the minimum down payments at 10-15%. In the primary mortgage market, the proportion of loans with a down payment not exceeding 20% in the total value of issued loans grew from 24% in 2020 Q2 to 45% in 2021 Q1.³ In the secondary mortgage market, the increase in the proportion of such loans over the specified period is negligible, i.e. from 30% to 33%.

The annual growth of outstanding loans in the mortgage loan portfolio denominated in rubles remain sustainably high at 23% as of 1 April 2021.⁴ In these conditions, banks are rapidly accumulating loans with a low down payment, which raises their vulnerability to possible shocks.

To mitigate the risks of mortgage lending associated with a low down payment, the Bank of Russia Board of Directors decided to raise risk-weight add-ons for mortgage loans with the loan to collateral value ratio from 80% to 85%. The new values of add-ons will range from 50 pp to 100 pp depending on the value of borrowers’ debt to income ratio and will be applied to loans issued from 1 August 2021.

Risk-weight add-ons on ruble mortgage loans issued from 1 August 2021 to individuals for purposes not related to their business activities, where the performance of borrowers’ obligations is secured by the collateral of residential and (or) non-residential premises

Risk-weight add-ons on ruble mortgage loans issued from 1 August 2021 to individuals for financing under equity construction agreements

The increase in add-ons will help reduce the incentives for banks to expand lending by issuing loans with a low down payment to borrowers, and will also speed up the recovery of the macroprudential buffer on mortgage loans and ensure banks’ resilience to potential stress scenarios.

Given that borrowers’ solvency largely depends on their debt to income ratio, in case of a further increase in this ratio and the persistent acceleration in the growth of real estate prices, the Bank of Russia may also consider setting risk-weight add-ons for loans with the down payment exceeding 20% and a high value of borrowers’ debt to income (DTI) ratio.⁵ In 2021 Q1, loans of borrowers with a high DTI ratio (more than 80%) accounted for 24% of the total value of issued mortgage loans.

¹ According to Rosstat.
² LTV ratio (loan/collateral).
³ According to Reporting Form 0409704.
⁴ According to Reporting Form 0409316 and Reporting Form 0420863 containing information on outstanding amounts under securitised mortgage loans. Including acquired rights of claim.
⁵ The implementation of this measure was planned for 2020, but it was cancelled afterwards due to the pandemic of Covid-19 (see the consultation paper Bank of Russia Measures to Ensure the Balanced Development of Mortgage Lending, December 2019).

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