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. Last Updated: 07/27/2016

State Insurer Targets 10% Down Payment

The Mortgage Lending Agency’s supervisory board has approved a plan to develop insurance for home loans, which will see a special subsidiary created in two months to help provide mortgages with 10 percent down payments by next summer.

“The insurance company compensates the bank for losses in situations where the bank has foreclosed on a property and was unable to recoup the sum of the loan by selling it,” said Alexander Semenyaka, the state corporation’s head.

Lenders currently offer loans for 70 percent of the property’s price, but mortgage insurance will allow them to extend up to 90 percent, as was the case before the crisis, he said. The difference of 20 percent and the associated risk are taken on by the insurer.

“The insurance rate will be 0.5 percent to 0.8 percent per year with annual payment (until the client’s contribution reaches 30 percent of the property’s cost) or 2 percent to 3 percent of the sum of the loan if it’s paid all at once,” said Leonid Vekshin, a deputy head of the agency, also known by its Russian acronym AIZhK.

From 2006 to 2008, when mortgages were last being provided with a 10 percent down payment, the interest rate in rubles was 13 percent to 14 percent, Vekshin said. “Our refinancing rate is 9.55 percent. The banks can add a bit to pay for the risk, plus there’s the mortgage insurance. As a result, the rate won’t be higher than it was on such loans before,” he said.

Half of all mortgages given from 2006 to 2008 had down payments of less than 30 percent, Vekshin added.

AIZhK’s insurance arm will focus primarily on reinsuring commercial insurers’ risk, Vekshin said, although it could also offer mortgage insurance directly in regions where other insurers do not or cannot operate.

As the plan stands now, the insurer would start with capital of 1.5 billion rubles, which could grow to 10.5 billion rubles by 2015, depending on how its business develops, he said.

Banks are looking to make loans more accessible and to lower their own risks, so the AIZhK proposal will be of interest, said Oleg Skvortsov, deputy chief of Absolute Bank. But the actual savings need additional study, he said.

A rate of 0.6 percent to 0.8 percent will not cover insurers’ risks, and with a state reinsurer there’s a risk that the work will become loss-making some five years down the road, said Vladimir Skvortsov, chief executive of AlfaStrakhovaniye.

Lowering down payments will not lead to a significant increase in mortgages, said Miel chairman Grigory Kulikov. People are more concerned with the interest rate than the size of the down payment, he told Vedomosti. Mortgages are more often used to improve living circumstances.