Government moves to reduce mortgage rates

Government moves to reduce mortgage rates

The government will launch a billion dollar program to support the mortgage market with part of the country's pension fund, provided banks provide mortgages at no more than 11%.

A hot topic Can Russian mortgage rates fall from their current average of 14%.

The government plans to make it happen, subsidizing rates on new homes at around 11%. Sergey Alaksashenko, macreconomist from the Higher School of Economics says that's still too high.

"By the middle of this year we shall have inflation at the level of 4-4.5%. That means that means that 7, 6.5 deposit rates is a lot for people, for the mortgages that are 10-20 years. And I think rather expensive for many people who would like to borrow from the banks in these conditions."

But professionals in the mortgage industry say a combination of inflation pressures and lack of competition will keep rates high.

According to the social policy institute, of 70 million working Russians, only half have legal contracts, and are paid official salaries, which are demanded by banks.

Seven million of those have the required $1000 dollars salary per month and most of them will take a joint mortgage as a couple. That means about 3 million households could potentially need a mortgage three times the current level.

The government is targeting a 5-fold increase in the mortgage volumes over the next few years. The state backed mortgages will be provided for new-build houses only. And that will support developers, according to James Cook, Chairman of Kreditmart.

"That's the right decision because it is going really to the right place, and particularly for developers that are trying to build new properties or trying to sell existing properties. It should be a very good stimulus to them."

The government believes it's a long-term programme to build millions of new homes. But analysts fear that developers won't be able to keep up with demand and a shortage could push real estate prices back up once again making mortgages unaffordable.

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