“UNDER ONE’S OWN ROOF…”

In Azerbaijan today any young or not-so-young family with a steady income and diligently paying its taxes can apply to improve its standard of living by taking out a mortgage. It may be true that the path to this cherished goal is not always smooth, and it stands to reason - the great risks, the unfortunate experiences of other countries, and on the whole the "youthfulness" of the very system of mortgage lending are forcing the government and the banks to treat mortgage applications with immense caution. But still, the fact that since 2006 thousands of people have obtained this credit shows that the system is working and the proposals for improving it coming in every year from the banks, the government, MPs, and so on indicate that it will continue to develop.

A year of hope

So, 2013 promises to be a very encouraging one for families patiently awaiting positive changes in the sphere of mortgage lending. Among other things, there is expected to be a softening of the conditions for social mortgages. Although at the beginning of February certain changes were made to the conditions for issuing preferential loans to purchase a house, it is quite possible they were not the last ones for this year.

The maximum amount of a loan for a social mortgage has been increased from AZN 35,000 to AZN 50,000. In addition, the range of recipients has broadened. Now, servicemen who have served for over three years (except for conscripts) and also those who have retired or are on the reserve also have access to a social mortgage. But it has not been discounted that this list will increase and may include young people who have not yet created a family but have the financial potential to obtain a mortgage loan. That, at least, is what Central Bank's general director, Rasad Orucev, believes.

Generally speaking, the country's leading banker Elman Rustamov believes, a social mortgage should be accessible to people with average or low incomes. In this connection it is planned to simplify the conditions for a mortgage loan, including increasing the maximum amount of the loan (which has already happened), extending the loan term and reducing interest on the loan. 

The deputy chairman of the social policy committee of the Milli Maclis, Musa Quliyev, is adamant that mortgage loans should not be issued with a commercial aim. "A mortgage is a project of state support for its homeless citizens and mortgage interest should be linked only with the level of inflation," he believes. The MP believes that the state should loan the citizen a certain sum to purchase an apartment for a long-term period and then receive this debt back after allowing for inflation. Today a preferential mortgage may be obtained at 4% APR and 8% standard rate.

"The Azerbaijani government has sufficient financial resources at its disposal and the size of the state budget is increasing year on year. All this gives us reason to suggest that interest-free mortgages could start to be applied," Quliyev said, adding that the aim in this case is to issue mortgages not only to young people and people with certain social needs, but also providing it to all homeless people. In this connection the social, and not the commercial, model of a mortgage should be given wider publicity.

Moreover, unfortunately, such programmes as "reverse mortgage", an alternative to a life annuity which the bank pays to a pensioner-borrower and a commercial mortgage (a loan using real estate as collateral) have not become widespread in our country. The only truly operating programmes today (along with social and a conventional mortgage) are an oil mortgage (providing housing for oil workers) and a military mortgage. In accordance with the Azerbaijani president's decree "On measures to increase the social protection of servicemen of the Armed Forces of the Azerbaijani Republic" of 28 December 2011, as of last year a process began for providing housing at state expense to servicemen for honourable service of 20 years and over in the Azerbaijani armed forces.

Another problem which concerns people who want to buy a property on loan is the down payment. For example, in order to obtain a loan of AZN 50,000 one must make a down payment of AZN 8-10,000 which sometimes is not so easy for a family on a medium-size income to save for in 2-3 years.

If the Central Bank's proposals are adopted, this problem will be solved, at least, for those obtaining a social mortgage. When the Mortgage Guarantee Fund, which is proposed to be set up within the Mortgage Fund, starts to operate they may be partially relieved of making a down payment. The mechanism is as follows: money from the guarantee fund provides the opportunity to partially insure the borrower's down payment and pass on this money to the AMF [Azerbaijani Mortgage Fund]. For example, a borrower will be able to contribute 5% and for 10% receive insurance in the fund. At the same time, the payment for these services will be inconsiderable so as not to be a burden on the borrower.

It is also proposed to increase the amount of loans for a conventional mortgage to approximately AZN 100,000 from the current AZN 50,000. But one may not expect a reduction in the rate of interest immediately. In the opinion of the general director of the CBA, Rasad Orucev, the 4-per cent interest rate on a social mortgage which is applied in Azerbaijan is believed to be one of the lowest in the world. The banks, he said, are also interested in extending the loan at the current rate because the mark-up they receive from the issuing of mortgage loans is 3% whereas they have to take the risk of issuing the loan and maintaining it over 25 years.

Time is money

There is also a need to simplify the conditions for obtaining a mortgage. At first glance they would appear to be simple: when applying to a bank all one needs is to have some form of identity and details about one's income. But at the same time one has to bear in mind that some banks only consider taxable income at one's principal place of employment which is confirmed by the bank statement. The bank may also impose additional demands on the borrower: evidence of registration, a certain period of service in one job and the possibility of providing referees. An assessment of the mortgage security is made at a later stage. In the event of a positive decision by the bank the borrower has to make a down payment (incidentally, if it exceeds the minimum established by the bank, then this will also strongly help the claimant to "grow in the eyes" of the bank). There then follows a process of formalizing the loan, the buying and selling of the property, and so on. All this is simple and quick - in words, of course - in actual fact all this takes time which the working man simply may not have.

This problem should be solved by introducing an electronic mortgage system which is expected already this year and will not only help to save people's time in obtaining a loan but also cut down on costs. Whereas today eight documents must be supplied to obtain a mortgage, which means an excessive waste of time, when the new website is up and running the number of these documents may be reduced by at least half. In view of the fact that the "Electronic Mortgage" project provides for reducing the human factor to a minimum not only is the efficiency of issuing mortgage credit increased but access to a mortgage in the country's regions is widened.

The government's main task is to ensure efficiency and solve the problems of housing in Azerbaijan's regions where the property market is growing all the time. The process of issuing electronic mortgages in turn helps to revitalize the work of regional branches of the banks, increase their numbers and raise the incomes of investors, the participants in the market believe.

At the present moment the issuing of mortgages through the AMF is being carried out, as well as in the capital, in Sumqayit and Ganca, and there is a great demand in Saki and Mingacevir where, incidentally, the level of average monthly income is almost on a level with that in Baku. According to research, a borrower with a monthly income of a minimum of AZN 800, which is almost half the official average monthly wage in the country, can actually obtain a mortgage.

Furthermore, the Central Bank and the Azerbaijani government are planning to help broaden the "cheap property" market, and in this regard they are studying the experience of neighbouring countries, in particular Turkey. Today the development of the cheap property market is very important in the country because, according to monitoring carried out by the Central Bank, the property market is an expensive one.

One must suppose that with the increase in budget revenue, funds for the development of mortgage loans will also increase. As a matter of fact, because of limited resources the total amount of loans issued over six years through the Mortgage Fund is a little over AZN 423m, whereas the demand for property funding is estimated at approximately AZN 1-1.5bn.

Be that as it may, the AMF's statistics show that over the past two years (2010-2012), the general fall in mortgage credit in Azerbaijan reached 23%. And only an integrated solution to all these problems and the centralized development of the social mortgage will help turn the statistical curve towards growth.