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. Last Updated: 07/27/2016

Refinancing Baffles Lawmakers

The battle for customers in Russia's increasingly competitive mortgage market is heating up, with an increasing number of banks setting up refinancing programs intended to undercut the ­opposition.

In February 2006, Raiffeisen was the first bank to set up a mortgage-refinancing program in Russia, with a number of banks, including Bank of Moscow, quickly following suit. Last Thursday, Alfa Bank announced that they too were entering the market.

As the mortgage market matures, however, legislators are left playing catch-up as the new developments in the market outstrip legislation and analysts lament the complexity of the refinancing process.

"Refinancing is most interesting for people who received loans five or six years ago. Five years ago, the interest rate was maybe 15 or 16 percent, and to be able to decrease your interest to 9 percent now is very appealing," said Roman Vorobyov, a board member at Raiffeisen Bank.

With government officials keen to make mortgages more accessible and to promote competition among banks, interest rates on mortgages in Russia have fallen dramatically over the past few years. Officials have repeatedly targeted an ambitious reduction to between 6 and 7 percent.

Already an accepted part of the developed mortgage markets in Europe and the United States, the appearance of refinancing programs is seen as a natural step in the evolution of the Russian mortgage industry.

In 2006, the number of mortgages taken out tripled, and the figures for this year are likely to follow a similar pattern. Only around 10 percent of property deals, however, involve mortgages.

"Nowadays, almost 10 percent of clients coming to Miel are interested in refinancing services and, according to our predictions, the number will grow as the overall number of mortgage borrowers grows," said Yulia Verbitskaya, director of the mortgage department at Miel real estate.

Potential first-time borrowers are increasingly interested in the possibility of refinancing their mortgages at some point in the future, as they become more savvy about ever-decreasing interest rates, Verbitskaya said.

"Without any doubt, mortgage refinancing is having a substantial influence on the Russian mortgage market," she said.

Some experts have said, however, that the expense and complexity of the refinancing process could put off some potential customers.

"It's a lengthy process, it's almost like taking out a new loan. Because you have to pay off a mortgage first and then you reregister, and the registration takes some time. So because of the logistics and difficulties that are associated with refinancing, it's not as easy as it is in the West," said Laura Fainzilberg, director of mortgages at DeltaCredit Bank.

As the legal and bank fees often stretch to thousands of dollars, refinancing only becomes an economically viable option if the difference between current and proposed rates is more than 2 percent, said Alexander ­Sherstyukov, director of retail at Bank of Moscow.

Further complicating the situation is the status of the tax breaks given to first-time mortgage borrowers as part of the national affordable housing project. At present, as part of the official push to encourage more people to buy a home, first-time mortgage borrowers are given a tax-rebate on the interest they pay.

But officials at the Finance Ministry have insisted that any mortgage that is refinanced will lose the right to the tax rebate.

"The [refinanced] credit does not have the same character as the principal credit spent by the taxpayer for purchasing an apartment," the Finance Ministry said, Vedomosti reported two weeks ago.

Even the experts are confused by a tax system that potentially denies cheaper mortgages to average Russians trying to buy their own home.

"I don't know whether this is really intended or if it is just a technical fault," Sherstyukov said. "I suppose that if people really lose their tax benefits, then it would have a dramatic effect on refinancing and no deals would happen at all."

But many commentators expect this inconsistency to be ironed out, with the State Duma said to be considering an amendment to the current legislation that would take refinancing into ­account.

"As the industry develops, I am sure the problem will be solved. The Russian legislators are the ones that are pushing the mortgages and trying to get the mortgage industry going. They understand the problem and they are working on it," Fainzilberg said.

"These people are continuing to pay for their properties and for that reason they have a right to receive the same tax breaks as before. But we need to respect the position of the Finance Ministry as well," said Pavel Medvedev, a member of the Duma's Subcomitee on Banking Legislation.