DREAM HOUSE

Anyone who thinks about buying a home is worried about one question - how, or to be more precise, when to make a purchase to avoid miscalculating the prices that constantly fluctuate in free market conditions. It is particularly difficult for those who intend to take a mortgage because they will have to pay additional interest on the loan.

Meanwhile, the most intelligent of buyers who expect better times count not on falling prices of apartments, but on a decline in mortgage rates. There are reasons here. After all, given the amounts used in mortgage lending, even a one-per-cent decline in the rate will help to save a substantial amount in a year.

A mortgage loan is good because it is repaid in installments over a long time. You cannot be one hundred per cent sure, but most likely, the money will depreciate in ten years due to inflation, while the monthly mortgage payments are a fixed amount. And the proportion of that amount will drop significantly in relation to the size of the family's income, of course, if you are able to get a mortgage, which we must admit is difficult to do in Azerbaijan today...

Raise and lower: new conditions

The main problem of the mortgage market in Azerbaijan today is the lack of funding. For example, in the first quarter of this year, banks were allocated half of the funds earmarked in the state budget for financing the social mortgage, and the Azerbaijan Mortgage Fund (AMF) is in no hurry to allocate the remaining 20 million manats because the Central Bank is in no hurry to open new limits on mortgage lending for banks.

As a result, banks which are authorized agents of the AMF cannot meet the increased consumer demand for mortgages. Almost all banks have used up their limits, and now it is very problematic to get a loan from the fund. Despite the fact that the latest issue of mortgage bonds, whose funds are used to finance conventional mortgages, are not fully available (there are still 26 million out of the 40 million manats left), no auctions have been held for the past two months.

In the absence of this source of funding for mortgages, banks could use their own assets, which are issued within the framework of their own mortgage programmes. However, because of the conditions, including interest rates that start from 12 per cent a year, these mortgages are not in great demand.

However, it is very likely that the situation in this segment will change soon - to the delight of potential borrowers, as President Ilham Aliyev has already issued instructions on that score. The head of state believes that mechanisms of mortgage lending should be improved. "They need to be reconsidered. However, certain reforms are currently being conducted in this sphere. But I think that more needs to be done, and the amount allocated for the development of mortgage lending should be increased," Ilham Aliyev said at a meeting of the Cabinet of Ministers dedicated to the socio-economic development of the country in the first quarter of 2013. According to him, if there is a possibility in the budget, if not this year, then next year mortgages should be increased so that the housing problem of the youth is solved faster.

However, according to the chairman of the Central Bank of Azerbaijan, Elman Rustamov, there are real preconditions for the implementation of this task, and now the Ministry of Finance is estimating the capabilities of the state budget and reserves and the Central Bank - market opportunities. Rustamov believes that involving additional resources from the market is quite feasible, and "we will use them to fulfill the president's instructions".

Elman Rustamov has said that on the whole the mechanism for providing mortgages in Azerbaijan is highly effective, since problem loans only amount to 0.3% in the overall mortgage portfolio. "This is a very low figure which demonstrates that there is a good and effective system of regulation in this sphere, Rustamov noted.

According to the chief banker of the country, mechanisms are currently being prepared to facilitate the issue of mortgage loans, and they will be implemented in the coming months. One innovation will be the introduction of an electronic mortgage, the draft of which was initiated six years ago, and it should greatly simplify the life of both banks and borrowers, and the AMF itself. According to the director-general of the CBA, Rasad Orucov, the project is already being completed and the AMF is testing the system in some banks. The electronic mortgage is expected to be launched in the second half of the year.

The Central Bank is also considering the possibility of returning to the idea of construction-savings banks. "But this is a separate issue due to the complexity of the mechanism. Under the existing system, the tools that Mortgage Fund will be able to use to raise funds from the market are being studied more actively. This is also being done in order to make the AMF more interesting and attractive for investors, not only local but also foreign," Orucov said.

Along with the Central Bank, the parliamentary committee on economic policy has also come up with its proposals to simplify the conditions for issuing mortgages. The committee's proposals include, in particular, cuts in interest rates and an increase in the maximum amount of the mortgage.

According to a member of the parliamentary committee on economic policy, MP Ali Masimli, in some developed countries, loans under conventional mortgages are issued at 4 per cent a year and social - at 2 per cent. "We propose reducing the conventional mortgage from the current 8 to 5 per cent and social mortgage - from 4 to 1.2 per cent," Masimli said.

The MP also considers it appropriate to reduce the upfront fee for the mortgage, because in some cases it creates additional difficulties for citizens. That's why MPs' proposals provide for either cancellation or reduction of the fee that constitutes 15 per cent of the value of the apartment in social mortgages and 20 per cent of conventional loans.

In addition, it is advisable to increase the upper limit of the amount of the mortgage, which currently stands at 50 million manats. Recently, in line with changes to the "rules of preferential mortgage loans in Azerbaijan", the maximum amount of the loan under the social mortgage was increased from 35,000 to 50,000 manats.

However, according to Masimli, the situation on the housing market shows that in Baku it is difficult to purchase a normal two- or three-room apartment for 50,000 manats. Therefore, the committee's proposals include an increase in the limit on the allocated amount to 70,000 manats.

Everything will be fine!

Meanwhile, a number of officials and experts also speak of the need to review the banks' own credit conditions for mortgage programmes, in particular, the need to reduce rates, which, in their opinion, cannot be compared with those offered in developed countries.

Representatives of the banking sector of Azerbaijan do not consider it correct to compare rates on loans in our country with the rates that are offered, for example, by banks in the European Union. Resources in the banking system of Azerbaijan are more expensive than similar resources in Europe: rates on deposits in European banks now account for 1 to 3 per cent, while in Azerbaijan - for up to 10-12 per cent. Hence the cost of the credits banks allocate to customers. In addition, the bank adds its own margin (a mark-up on the resource) to the cost of resources - an amount that covers their possible losses and generates the income of the bank. The bank cannot lend with a rate below the deposit, as it should have a profit and cover potential losses from bad loans. This margin in Azerbaijan is higher than in the banks of the developed world, but not higher than in some neighbouring countries.

In Azerbaijan, deposits are attracted for a short period - from 1 to 3 years. Accordingly, banks will create very serious risks for themselves, attracting money for 3 years and placing them for 25 years. Therefore, the "length of money" is the main reason that in Azerbaijan mortgages, to put it mildly, are reluctantly issued by banks at their own expense. Moreover, since the borrowed funds are generated through foreign currency, mainly US dollars, it also creates some difficulties in terms of the foreign exchange risk and in terms of the fact that the hedging costs of this money are 4-5 per cent per year. Therefore, banks are not very interested in placing money in foreign currency in mortgage programmes.

However, banks believe that the situation with interest rates on consumer and mortgage loans will change over time. Experience shows that in previous years - 5-10 years - interest rates were falling. The same thing happened with the rates on deposits. If previously deposits were attracted with 15-18 per cent, today it is up to 10-12 per cent a year. For example, the Azerbaijan Deposit Insurance Fund (ADIF) today insures deposits at a rate that does not exceed 12 per cent a year. The downward trend in rates continues. The banking sector is growing, and the bigger and stronger it is, the more there will be a drop in rates on deposits and loans. In other words, the fall in interest rates on loans in Azerbaijan to the European level of 7-8 per cent is just a matter of time, but it will not happen in the short-term.

Also, of course, it is advisable to introduce all mortgage innovations in parallel with reforms in housing, in particular, with the increase in the building of municipal and low-cost housing. After all, a decline in mortgage rates will push up apartment prices, and thus, again, will not boost public access to it. In this connection, according to Rustamov, Azerbaijan's Central Bank is conducting talks with the country's government and the banking sector on drawing up a major construction project for affordable housing in the republic.

Meanwhile, according to Central Bank estimates, over the next 10 years, the share of mortgage loans in the country's GDP will increase by 10 times. In addition, in the future, the focus will be on the development of new sources of mortgage financing, as well as enhanced access to mortgages. At the same time, one of the goals of the "social building" strategy is to expand the coverage and scope of social mortgage. Now the Central Bank is actively exploring the world experience to work in this direction.

But in any case, the mortgage has allowed 11,000 families in Azerbaijan to become owners of new housing. And all of the above measures are intended to increase this number by several times and resolve many of the problems Azerbaijanis are facing in improving their housing conditions.