Bank of Russia raises macroprudential requirements for mortgage loans

Effective from 1 October 2023, the Bank of Russia is going to raise risk-weight add-ons for mortgage loans. This measure is aimed at mitigating risks for borrowers and banks.

In making this decision, the Bank of Russia Board of Directors was guided by the following.

On 1 May 2023, the Bank of Russia set add-ons for loans for financing under ECAs (equity construction agreements) with down payments below 30% and for loans for ready housing with down payments below 15%,¹ but the impact of these add-ons on mortgage risk accumulation proved to be insufficient.

Growth in mortgage lending is accelerating considerably. Since March 2023, the monthly growth rate of mortgage lending has been above 2%. In June, the growth rate of outstanding amounts was up to 2.5%.² As a result, the annualised growth of the mortgage portfolio stood at 27% as of 1 July 2023. This acceleration has been driven by the expansion of mortgage lending to riskier groups of clients, which in turn leads to the consistent worsening of lending standards. In the course of two years, the proportion of new loans with DSTI³ over 80% grew by 18 pp to 39% in 2023 Q2 for loans issued to finance ECAs and by 20 pp to 43% for loans for ready housing.⁴ During this period, there was also seen a significant increase in the proportion of loans with small down payments (below 20%): for loans for ECAs — by 15 pp to 63%; and for loans for ready housing — by 10 pp to 44%.

The practice of selling overpriced residential housing in the primary market has been generally ended, which is in part reflected in a decrease in the average amount of loans issued in this segment, i.e. from ₽6 million in mid-2022 to ₽4.9 million in 2023 Q2. Nonetheless, the price gap between the primary and secondary market remains: it amounted to 40% in the first quarter and 39% in the second quarter. In this situation, the loan-to-value ratio (LTV) in the ECA segment may still be systemically underestimated (i.e. the real LTV for new loans in the primary market is higher).

The Bank of Russia does not have a possibility to apply macroprudential limits in mortgage lending and use them to directly limit the share of the most risky loans.⁵ In these conditions, the Bank of Russia sets macroprudential add-ons for such loans at a prohibitive level, with an effect from 1 October 2023. The highest add-ons are set in the ECA segment to take into account the overestimated housing prices in the primary market.

Risk-weight add-ons for mortgage loans issued after 1 October 2023 and secured by claims under equity construction agreements

Given that the value of collateral is not materially overestimated in the secondary housing market, add-ons will be increased to a lesser extent in this segment from 1 October 2023. Higher add-ons will help prevent further deterioration in lending standards, reflected in the growing proportion of loans with low down payments and loans with high DSTI ratios.

Risk-weight add-ons for mortgage loans issued after 1 October 2023 and secured by residential real estate

If the lending structure remains as is, in a year, banks will accumulate a macroprudential capital buffer in mortgage lending of ₽600 billion, which corresponds to 4% of the mortgage portfolio. Concurrently, given the prohibitive nature of the add-ons, one can expect lending to shift towards less risky loans. Higher add-ons may also lead to a more balanced growth rate in mortgage lending. If the situation stabilises and credit institutions return to more conservative lending standards, the Bank of Russia will stand ready to ease the requirements for macroprudential add-ons in mortgage lending.

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