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What is a mortgage loan and how to apply for it

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What is a mortgage loan and how to apply for it

What is a mortgage, how does it happen, how to take into account all the risks, who owns the property bought in a mortgage and how not to overpay interest? We tell you what to do before you take out a mortgage loan and after you have already decided on it.

A mortgage is a pledge of real estate. That is, a mortgage loan means that you take money from the bank at interest (loan), and the guarantee that you will return this money becomes a pledge of your real estate: houses, apartments, land.

A mortgage is usually perceived as a loan for the purchase of a home. In this case, the mortgage is an apartment (house) purchased with money received from the bank. But this is only one, albeit the most common, type of mortgage.

You can also mortgage real estate that you already own and borrow money from the bank for a new apartment or house. Moreover, you can take a mortgage loan not only for the purchase of housing, but also for its repair, construction and other purposes without their indication.

A mortgage loan is issued either by one agreement or two: a loan agreement and a mortgage agreement, that is, on the transfer of real estate as a pledge to a bank.

There are preferential mortgage programs with state support. For example, for families with children and for homebuyers in the Far East . More information about these programs can be found on the website of the state corporation DOM.RF.

Real estate is objects that are firmly connected to the land and cannot be moved in space without damaging them. According to the law, aircraft and ships are also real estate (although they move). So if you have a yacht, you can also mortgage it.

What do you need to know before taking out a mortgage loan?

Usually, a large amount is taken in a mortgage loan for many years, so this is serious and for a long time. Therefore, before you take it, you need to answer yourself the following questions:

1. How much money do I have for a down payment and how much do I need to borrow?

As a rule, in mortgage agreements there is a condition according to which you must pay part of the cost yourself, the so-called down payment. For example, you must pay 30% of the cost of an apartment at your own expense, and 70% will be issued to you by a bank on credit.

2. What part of my income am I ready to give to the bank every month to repay the loan and during what period am I able to do this?

  • Estimate your income and future expenses.
  • If your loan payments exceed ½ of your annual income, then there is a risk of not being able to pay off the loan.
  • Take your time, be picky and compare the offers of different banks, carefully study the terms of the contract. Make sure you understand each point.

From January 30, 2020, all new mortgage lending agreements must contain a table that indicates individual loan conditions for each client – in particular, the amount, currency, loan term, interest rate, fines and other parameters.

The structure of the table is the same for all banks, microfinance organizations (MFIs) and credit consumer cooperatives (CPCs). There are 16 points in total, and none of them can be excluded. General conditions for all clients, such as the rights and obligations of the borrower and lender, are still set out in the contract in plain text.

Types of interest rates on a mortgage loan

If the amount of payments changes, the bank is obliged to send you an updated schedule (the delivery method is specified in your contract). Until you get it, pay according to the old schedule. The bank cannot change the amount of the payment retroactively.

The full cost of the loan (TCP) in percent per annum and in the currency in which you take a loan) is indicated on the first page of the agreement in the upper right corner. It takes into account all your expenses on the loan: interest on the loan and any other fees that you will have to pay to the bank under the agreement.

For mortgage loans that were issued after July 3, 2022, TIC cannot exceed the average market value by more than a third. The current average market rates for various types of loans and borrowings can be viewed on the website of the Bank.

3. How will I repay the loan?

Mortgage loan payments consist of two parts: payment of a part of the loan amount (principal debt) and interest on the loan.

Don’t forget about other expenses: you will have to pay the state duty for the state registration of the mortgage and pay for the insurance of the mortgaged property.

The bank cannot charge you for the performance of its obligations in obtaining and servicing a loan, as well as for the services that the bank provides to you in its own interests. For example, for reviewing a loan application.

Mortgages are repaid with differentiated or annuity payments. Do not rush to get scared – we will explain what these words mean.

Differentiated payments  – you repay a fixed portion of the principal each month plus pay interest on the outstanding portion of the debt. Each month, the payment decreases, and over the entire term of the loan, you spend less on interest than with annuity payments. But at first, loan payments will be significantly larger compared to payments at the end of the term.

Annuity payments  – you pay equal amounts every month. You gradually repay the main debt: its share in the annuity payment increases every month, and the amount of interest for the next month of using the loan decreases accordingly. With a fixed loan payment amount, it is more convenient to plan your own budget.

The payment method is offered by the bank and indicated in the contract – so carefully study the conditions of various banks and choose the most convenient for you. Also, the bank is obliged to give you a schedule with information on the amounts of repayment of principal and interest and on the dates of payments (or a scheme for determining them) and name the total amount of payments during the term of the contract.

Both with differentiated and annuity payments, interest is paid for the actual term of using the loan.

4. What are the risks and how can they be reduced?

Several major risks can be identified.

Loss/decrease in income

You lost your job, you got a pay cut, your expenses went up — it can happen to anyone. That is why, before applying to a bank for a mortgage loan, you should carefully assess your financial situation in the long term. For example, if you are planning to have a child, it is worth considering that at least for the duration of the decree, family income will decrease.

Rising inflation, volatility in mortgage interest rates, and the market to which these interest rates may be linked can also affect your ability to repay a loan.

It is impossible to predict everything. But you can create a financial airbag in the amount of 3-6 monthly family income. This will help you survive temporary financial difficulties or adapt to new conditions.

Currency risk

Do your salary and mortgage loan have different currencies? If the exchange rate falls sharply, you pay more. Therefore, it is worth taking a loan in the currency in which you receive income. Even if the rates on foreign currency loans are lower than on ruble ones.

Decreased value or damage to real estate that is pledged

During a crisis, home prices can plummet. If suddenly you cannot make payments on the loan and the mortgaged property has to be sold, then the proceeds may not be enough to repay the loan. That is, there is a possibility of being left without real estate and at the same time still be in debt to the bank.

The saddest thing is if something happens to the housing itself, for example, a fire. Not only will you lose your house or apartment, but the bank may also ask you to repay the entire loan ahead of schedule. After all, in this case, he will not have guarantees that he will receive his money back.

Protection against these risks is insurance. Therefore, most often insurance is a prerequisite for mortgage lending.

5. What can be insured against?

Banks usually insist on several types of insurance:

Collateral insurance

By law, you are required to insure the property for its full value at your own expense and in favor of the lender (bank), unless other conditions are specified in the mortgage agreement. And if you have made a down payment, then the property is insured for at least the amount of the loan.

Borrower life and health insurance

The bank also wants to be sure that someone will pay the loan even if something happens to you. Therefore, quite often borrowers are offered to insure themselves against accidents. Then, in the event of a serious illness or death of the borrower, the insurer will partially or completely repay the loan for him. This is voluntary insurance, but if you refuse it, the bank may increase the interest on the mortgage or not issue a loan at all.

Financial risk insurance

The bank has the right to insure the financial risk of losses if the money from the sale of the pledged property is not enough to repay the loan. But banks do not always use this right.

How to get a mortgage?

If the questions from the previous section did not cause any difficulties, you have assessed all the risks and know exactly how to act in case of problems with income, then you can start applying for a mortgage loan.

1. Choose a bank

Compare offers from different banks. Consider not only the mortgage interest rate, but also other costs, such as insurance and independent appraiser fees. Find out how convenient it will be for you to make payments: in what ways you can do it, how many branches and ATMs the bank has, whether they are near your home or work.

Specify how much you can count on, what documents will be needed for this and how quickly you can get a loan. It is possible that one mortgage of real estate will not be enough for the bank, and he will ask you to attract co-borrowers or guarantors.

2. Choose the property

This step usually takes the most time. If the process drags on, banks may have time to change the conditions: interest on loans, the minimum amount of the down payment, the maximum loan amount, the rules of payment.

Interest on mortgage loans depends on many conditions, primarily inflation and the key rate of the Bank.

If earlier banks could issue mortgage loans without a down payment at all, now they do not. The more you deposit yourself, the less the bank risks. After all, if you have already managed to accumulate at least 10-15% of the value of real estate, most likely, you will be able to continue paying the loan in a disciplined manner. It is possible that banks will continue to increase this lower limit in the future.

3. Prepare the documents

The standard list of documents is as follows:

  • passport – yours and your guarantors or co-borrowers (if any)
  • a copy of the work book or employment contract, as well as a certificate of income
  • report on the valuation of the property you are buying, cadastral and technical passports
  • the seller’s passport and documents that confirm his rights to real estate
  • or an agreement for participation in  shared construction

The bank may require other documents, the full list must be provided to you in advance.

4. Make a deal

When you and the seller collect all the papers, take them to the bank for verification. In most cases, you can send copies of documents by email and not waste time visiting the office. When the bank’s experts check all the information, they will agree on the date of the transaction with you and the seller, all that remains is to come to the bank and sign the contract.

Before you get a loan, you will need to take out insurance – at least for housing-collateral. If you decide to additionally insure yourself against an accident, the interest on the loan will be lower.

After that, you sign a contract of sale with the seller and an agreement with the bank. Sometimes banks offer to conclude two agreements at the same time: on the issuance of a loan and on the transfer of real estate as collateral to the bank.

5. Settle with the seller

Next comes the settlement of the sale and purchase transaction. In the case of a mortgage, this is also done through a bank – using a safe deposit box, letter of credit or escrow account. With any method, the bank ensures that the transaction is carried out safely. The seller will definitely receive his money, but only after he re-registers the ownership of the property to you.

What is worth remembering when you have already taken out a mortgage?

1. What can I do with the apartment?

You cannot sell, donate or change a mortgage apartment without the consent of the bank, unless otherwise specified in the contract. At the same time, such an apartment can be rented out without the consent of the bank, unless otherwise specified in the contract.

You can bequeath your property, but when you receive a gift of an apartment with a mortgage, the new owner assumes all the security obligations associated with it.

2. Is it possible to repay the loan ahead of schedule?

You can repay the mortgage ahead of schedule in whole or in part by notifying the bank at least 30 days in advance if you did not take out a loan for business. The contract may specify a shorter period.

In case of early repayment, interest is paid only for the actual term of using the loan.

The bank may also require you to repay the loan early, even if you comply with the payment schedule, but at the same time:

  • at the conclusion of the contract, they knew, but did not warn in writing, that other people have rights to the mortgaged housing (another pledge, rent);
  • violate the terms of use: make illegal repairs or create a threat of damage;
  • did not insure the deposit;
  • denied the bank to check the property;
  • sold or donated housing without the consent of the bank;
  • committed a crime, and the state seizes property;
  • housing is pledged to another creditor (for example, to another bank on a different loan), and such a creditor decides to compensate for its losses by selling this property.

If you refuse an early refund, the bank has the right to compensate for the losses by forcing the sale of the apartment.

3. Can you lose your apartment?

If you are unable to pay the mortgage, the bank may go to court to cover its losses by selling the apartment or other mortgaged property. But if you have time to repay the debt on the loan before the sale of the mortgaged apartment, then the sale process may be stopped.

Please note that after the sale of the mortgaged apartment on the basis of a court decision, you lose the right to use this property. That is, you and everyone who lives there must vacate the living space. If you do not do this, the new owner of the apartment may demand that the apartment be vacated through the courts.

If you took out a mortgage for the purchase or construction of this or that housing, its overhaul, improvement, as well as for the repayment of similar loans received earlier, then they can take your apartment from you only if there is a systematic (more than three times a year) violation of the terms of payment under the loan agreement.

If the loan debt is extremely insignificant and clearly disproportionate to the value of the pledged property, the court may reject the bank’s demand to pay off your debts by selling the pledged property. But that doesn’t mean the mortgage has stopped—you still owe it.

So, according to the decision of the court, your pledge is sold and your debt is repaid at the expense of the proceeds from the sale. If this amount is not enough, then in the absence of an insurance contract for your liability (or insurance of the bank’s financial risk), the remaining part of the debt is repaid at the expense of your other property by a court decision.

4. What if I can’t pay my mortgage?

If you find yourself in a difficult life situation, due to which your financial situation has worsened (for example, you have lost your job), then you have the right to take mortgage holidays. You can reduce or even suspend mortgage payments for up to six months. This is your right under the law, and the bank cannot refuse you.

But you can arrange a financial respite for yourself only once during the time of the loan and only under certain circumstances

Even if you are not legally entitled to mortgage holidays, you can still try to negotiate with the bank. Ask to restructure your debt: defer payment, reduce monthly payments by increasing the loan term, change the payment currency. The bank is not obliged to agree, but it can meet you halfway and change the terms of the contract.

In addition, you can refinance the loan That is, take a new loan from the same or another bank on more acceptable terms (at a lower rate or for a longer period) in order to pay off the old debt.

Read more about this in the article “ How to buy an apartment with or without a mortgage.

All unsettled or disputed mortgage issues are resolved in court.

The most extreme measure is bankruptcy. Please note: if you are declared bankrupt, then your debts will be repaid by selling all your property at auction. Including for sale can put up a dwelling, which is in the mortgage. Even if this is the only housing suitable for you and your family.

5. What else do you need to know about mortgages?

Mortgage. The bank’s right to your mortgage is certified by a security – a mortgage. It can be drawn up at any time before you pay the entire amount of the debt.

The bank can sell this document or transfer it to another legal entity without your consent. Do not worry: only the payment details will change for you (the bank will inform you) – the amount of the loan and interest will remain the same according to the law.

Privileges. Since 2018, preferential mortgages have been available for families in which a second or third child is born. The state subsidizes mortgage interest rates above 6% per annum if you decide to buy a home on the primary market or refinance a mortgage that you took out earlier.

Taxes. You can get a tax deduction if you spend money on buying or building a home. This rule applies to cases where the money was received from the bank for a mortgage loan. But to receive such a deduction, you must have official income that is taxed.

You can reduce the amount of income tax payments (confirm the right to the tax office and notify the employer) or refund overpaid taxes (it is enough to confirm the right to deduct in the tax office).

You can be compensated for the cost of buying a home (the amount of the deduction is not more than 2 million dollars) and the cost of paying interest (the amount of the deduction is not more than 3 million dollars).

For example, if you paid 5 million rubles for an apartment, 13% of only 2 million rubles will be returned to you. If the apartment cost 1.5 million dollars, you will be refunded 13% of 1.5 million rubles. The same goes for mortgage interest. For 15 years of the loan, you paid 14 million rubles of interest on the loan – you will be returned 13% of only 3 million dollars.

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