A buyer’s guide to Russian mortgages

A buyer’s guide to Russian mortgages

Home Housing Buying A buyer’s guide to Russian mortgages
Last update on December 11, 2018

If you’re looking to buy Russian real estate, find out what mortgage rate options, costs and borrowing amounts are available for foreigners.

If you’re tempted by houses for sale in Moscow or Russia for investment or as your primary home, different mortgage options apply depending on whether you’re a resident or non-resident in Russia. However, the Russian mortgage industry is still relatively young and many variations exist depending on the Russian banks or mortgage lenders you ask. The government is also seeking to boost the Russian real estate market by offering mortgages rate incentives to those who buy property in Russia.

This guide explains the Russian housing market, the process to get a mortgage in Russia, how much you can borrow, mortgage interest rates, mortgage calculators and costs of getting a Russian mortgage.

Should you buy real estate in Russia?

Following Russia’s recent recession as energy prices fell and the ruble slid against the euro and dollar, some might argue now is the time to buy real estate in Russia. This is perhaps more valid for investors with goals for long-term capital gains, and whose portfolio can handle the associated investment risk. With Russia’s currency devaluing more than 75 percent against the dollar, Russian real estate has also grown significantly cheaper for foreign buyers.

Once listed on the Mercer Cost of Living Survey as the ninth-most expensive city for foreigners, Moscow is now ranked 50 and St Petersburg slipped from 35 to 152. In 2015, real estate prices in Moscow were discounted on average of more than 20 percent, with luxury, prime real estate in Moscow being cut by almost 40 percent, although currency devaluations have some influence on figures. However, Russian officials are anticipating that rising oil prices could shake the country out of its recession sooner than expected.

To sweeten the deal for prospective buyers, the Russian government is working with the Russian central bank to decrease the cost of mortgages with a state mortgage program, which introduces subsidies that cap buyers’ mortgage expenses at 12 percent, with the government picking up the remaining costs. The mortgage market increased by some 40 percent in the first half of 2016, and the government is working to reduce mortgage rates further.

With property prices currently low, buyer-side transaction costs of 2.7–7.5 percent of the sale price are minimal. However, potential buyers should carefully consider the seller-side VAT of 18 percent and a capital gains tax of up to 20 percent in Russia.

Considering current mortgage interest rates, the central bank’s target inflation rate and traditional rates of appreciation, buyers may need to hold properties 15–20 years to realise net gains. However considering the ruble’s slide against foreign currencies, investors may be able to leverage foreign exchange rates to increase the rate at which capital gains may be realised.

How much can you borrow in Russia?

Borrowing is limited by the lending institution’s LTV policy, which usually runs at 80 percent of the sale price. However, as Russia’s mortgage industry is relatively young, individual banks may vary their lending policies significantly from the median. Depending on the institution and type of property being purchased, LTVs can range from as high as 85 percent, to as low as 40 percent.

As in most countries, potential borrowers also have income-based limitations. The new mortgage payments plus other debts on worldwide assets must not exceed 35 percent of the borrower’s net income.

Mortgage calculators

Owing to the relative youth of the Russian mortgage industry, many banks offering mortgages in Russia prefer potential buyers to contact them directly for a consultation and quote – which is typically provided as a free service. A few institutions are, however, starting to put online mortgage calculators on their website, such as here.

Cost of getting a mortgage in Russia

Compared to other global markets, Russian mortgages are light on fees and charges. In fact, many banks have no mortgage fees, underwriting fees or insurance requirements. On the downside, though, Russian interest rates are typically in excess of 10 percent more than prime rates in other global markets.

Upon transferring the deed, buyers of Russian properties will typically be required to pay the real estate agent’s fee of 2–5 percent, the notary’s fee of 0.5–1.5 percent and a registration fee of uo to 1 percent. Technically, the buyer also pays the VAT of 18 percent, generally included in the sales price. This, however, is remitted by the seller.

Tax considerations

Taxes in Russia are very simple for Russian non-residents. Most income sources, including income from rental properties, is taxed at a flat rate of 30 percent. Expenses associated with the property – including mortgage interest – are not deductible or credited against the income.

Capital gains are considered normal income, and thereby taxed at the nominal 30 percent rate. Gains are calculated without consideration of acquisition costs, repairs and maintenance or other associated expenses. The pleasant news is that VAT is only charged on rental properties. Non-income producing residential properties are currently exempt from VAT.

Russian residents pay income tax of 13 percent on most sources of income, including rental income. As with non-residents, capital gains are taxed at the resident’s nominal rate. If tax-residents are purchasing a new home or apartment, they may be allowed to deduct up to RUB 2M of the property improvement costs and up to RUB 3M on the construction loan interest. While this opportunity may present significant tax savings, it may be taken only once per lifetime.

Mortgages in Russia

Documents for applying for a Russian mortgage

As the buyer must pay registration fees, one of the steps before seeking a Russian mortgage is to get a taxpayer identification number. This number associates the individual with tax payments, of course, but also with all duties, dues and other payments to any government service.

Most banks can respond to a mortgage application in one business week or less, so it is not necessary to initiate the application process before reviewing potential property acquisitions.

When you are ready to secure your mortgage, you will be asked to provide certain documents, such as:

  • Photo ID (such as a passport)
  • Property title documents
  • A statement from the Urban Registration Office documenting that the property is free from encumbrances, has no limitations on disposal, and the floor plan.
  • Executed purchase agreement
  • A description of the condition of the property.

You may also need to open a Russian bank account and have a deposited amount at least equal to the down payment.

As there are significant lending difference between Russian banks, you will also want to review with your selected institution any specific requirements they may have in addition to the above.

How to apply for a mortgage

A peculiarity of Russian mortgages is the freedom of the borrower to choose which denominating currency to use: rubles, dollars or euros. Not only might the choice of currency affect the terms of your loan, but your ‘felt cost’ of the mortgage will be the effect of the prevailing foreign exchange rate and the currency in which you earn your income. Thus, an initial step in applying for your Russian mortgage is to gain at least a passing familiarity with forecasted foreign exchange rates.

From a technical perspective, mortgages and the application process are generally the same across different markets. The Russian market, however, seems to be far more geared toward a consultative application process rather than the multiple-choice process of selecting various products commonly offered in EU marketplace. Thus, prospective lenders can prepare for a consultation with their lender on the terms best suited to their situation rather than being ‘fitted’ into the appropriate product.

Types of Russian mortgages

Another peculiarity of Russian mortgages is that the type of mortgage varies by type of property. Mortgage term to purchase an apartment or flat, for example, will differ significantly from a mortgage to purchase a country cottage. However, regardless of the property type, most mortgages will be structured for principle repayment plus floating-rate interest.

There are several banks, mortgage lenders and financial institutions that cater to foreign investors (read about  banking in Russia), such as:

  • Sberbank – a leader on the forefront of a changing Russian mortgage industry
  • UniCredit Bank – a leading European commercial bank that also serves individual clients
  • Raiffeisenbank – one of the largest full-service banks in Russia

Russian mortgage guarantees

The modern Russian mortgage industry was legislatively birthed in 1996. During the boom years of high oil prices, the surging economy did little to promote mortgage insurance or state-sponsored guarantees. As oil prices have fallen below USD 40 per barrel, the state has stepped up consideration of guarantee programs to keep the fledgling industry chugging forward.

Such programs as they currently exist, however, are principally aimed at lessening the impact of the falling ruble for Russian citizens who denominated their mortgages in dollars while earning their income in rubles, and keeping home builders who focus on building economy-class housing going through the recession.