Banks see home loan portfolios balloon as buyers snap up flats
Just a few years ago, obtaining a loan to purchase an apartment in the capital was a major accomplishment. Today, competition in the mortgage market is flourishing, and the country’s major banks are redoubling their efforts to make home loans a significant part of their consumer banking activity.
Pravex Bank has seen increased interest from potential homeowners, according to Vice President Irena Kilchitska, and has doubled the number of home loans it has made every year since 2000. Last year, the bank made 530 mortgage loans worth $12 million.
Nadra Bank increased its home loan portfolio by 400 percent last year, according to Vice President Oksana Kirienko. She said that the bank did $5 million in mortgage lending business during 2002 alone. “We plan to increase our mortgage lending portfolio by 250 percent in 2003,” Kirienko said.
Bankers said that the mortgage lending market was flat until 1999, when a few Ukrainian banks tenuously launched experimental mortgage loan programs. Today, despite its relative youth, Kirienko said that the country’s mortgage market is developed and growing fast.
Banking officials cite an improved economy, booming residential construction and higher wages as factors stimulating the market’s development.
As mortgage lending has matured as a banking product, interest rates and mandatory down payments have declined, and longer-term loans have been offered.
Banks offer mortgages denominated in both dollars and hryvna. Interest rates vary for each.
Over the past five years, interest on hryvna-denominated mortgages has declined by more than half, from as high as 45 percent per annum in 1999 to as low as 21 percent per annum this year. Hard currency mortgage rates also dropped from 27 percent to 14 percent over the same period. Even lower rates are offered for borrowers deemed to pose reduced default risks.
“If the hryvna rate is 23 percent, we can make a 21 percent loan to a client we trust. The hard currency rate can also be reduced by up to two percent,” Kirienko said.
Bankers say that in rare cases they are willing to extend loan terms for reliable borrowers. Mortgages are usually offered over 5-year or 10-year periods.
“We scrutinized demand and concluded that 7 years is the optimal loan term. Usually, people want to repay as soon as possible,” said Kirienko.
Lower interest rates have served as an incentive for borrowers to opt for loans denominated in hard currency.
“Of our mortgage lending portfolio, 90 percent is in dollars,” said Kirienko.
Most banks are making loans for established homes and residences, but one, Arkada Bank, exclusively finances purchase of apartments in new residential buildings built by Kyivmiskbud.
Evheny Nam, who heads Nadra’s consumer credit department, said his bank earmarks 30 percent of its credit portfolio for new construction loans.
Nam said that the number of new housing projects underway in the capital would encourage banks to reevaluate their lending programs, and develop more attractive loan packages as a result.
Even so, with prices for new construction often substantially higher than for comparable flats in older buildings, the loan market for older homes should be secure for some time to come, according to Kilchitska.
“Most people will not be able to afford new apartments for a long time,” she said. She said that borrowers could discover unexpected problems if builders don’t complete their project on schedule. “As an investor in the construction, a buyer can’t be certain that construction will be finished on time or not. When builders miss their deadlines, the homeowners may need to invest more cash than they had expected to see the project to completion.”
Kilchitska said that the portrait of the average borrower has changed significantly over the past few years. She said that today’s borrowers tend to be people with middle-class incomes.
“People who earn $250 per month can afford to take out a mortgage,” she said, adding the bankers don’t like to see housing costs exceed half of a borrower’s monthly income.
The amount of equity required to obtain a loan has dropped significantly over the past several years, with down payments declining from an average of 50 percent of the apartment’s value in 1999 to as low as 20 percent today.
One factor driving innovation in the home loan market is competition. Banks offering mortgages are also requiring less documentation than ever before. “We are asking customers to provide less documentation than we did previously, simplifying the procedure of approving a new mortgage,” Nam said.
“We can make a loan decision within two days, and the risk has been all but eliminated,” Kilchitska said. “Our program runs like clockwork.”
Young families and retirees are two groups that may experience difficulty obtaining mortgage loans, principally because the country’s laws bar banks from foreclosing on apartments occupied by retirees and children.
“Banks are reluctant to make loans to borrowers who are likely to have children living in the apartment,” Nam said.
Even so, foreclosures on individuals living without dependents are rare.
“Borrowers are strikingly conscientious,” Kilchitska said.
“We have had to sell apartments only a couple of times because the clients didn’t want to repay,” Kirienko said. “People treat banks very responsibly.”
