HOPING FOR RELIABLE MORTGAGE

Azerbaijan's mortgage market is currently experiencing significant growth, driven by the increasing cost of housing and ongoing demand. Since its introduction in 2006, the practice of issuing loans for home purchases through state channels has proven effective, and within a short time, banks began to offer similar products using their own funds. As a result, mortgage loans totalling ₼4.5 billion have been issued in the country to date. Of this amount, ₼3.3 billion were allocated by the Mortgage and Loan Guarantee Fund (MLGF) of Azerbaijan to authorised banks (currently there are 21), while the banks themselves contributed ₼1.2 billion. This is largely due to the MLGF's more favourable terms compared to commercial banks, particularly for social mortgages, which are available to those meeting the criteria for subsidised lending.

Additionally, a significant accomplishment of the MLGF during its operational history has been the enhancement of lending transparency through the transition to an electronic format for nearly the entirety of its processes.

Key Takeaways

Analysts project that the housing price increase observed in Azerbaijan in 2024 will persist into the upcoming year, with a minimum anticipated rise of 10-15%. This is attributed to the rising costs of construction materials and labour, as well as large-scale demolition programs in various parts of Baku, which further exacerbate the already high demand in the market. Experts project that prices for apartments in new multi-family buildings will rise by an average of 15-17%, while prices on the secondary market will increase by 10-13%.

This has the potential to make purchasing a home, which is already a significant financial burden for many, seem like an unattainable dream or a long-term project. Housing finance mechanisms are designed to address these challenges, offering a structured approach to real estate acquisition.

Currently, the number of citizens who have received mortgage loans through state channels has exceeded 52,400, while 12,000 have utilised bank mortgage programs. According to Rasim Abdullayev, director of the MLGF's mortgage lending department, approximately 32% of the total volume of issued loans consists of subsidised mortgages. Notably, young people and families have demonstrated a strong capacity to secure long-term financing for home purchases, accounting for 73% of the entire portfolio.

The total amount of issued loans has been steadily rising for five consecutive years. In 2023, conventional mortgages amounted to ₼348.5 million, marking a 10% increase compared to the previous year, and in 2024, this figure grew by an additional 3%. The majority of these loans were concentrated in Baku, with only 18% distributed across the country's 50 districts.

It is important to note that conventional mortgage loans, which are not considered social loans, are funded entirely by the MLGF's own financial resources, including the successful issuance of bonds and the refinancing of loan capital. According to Ilham Kelesov, advisor to the chairman of the MLGF, over its years of operation, the fund has attracted around ₼3 billion from capital markets; currently, bonds amounting to more than ₼2 billion are in circulation, with interest payments to bondholders totalling approximately ₼278.5 million.

Additionally, it has been reported that the MLGF has issued guarantees for more than 1,134 mortgage loans totalling nearly ₼99 million. Since 2018, the fund has started offering guarantees for mortgage loans, enabling individuals with limited personal savings to acquire housing through mortgages with a reduced down payment. This initiative has not only accelerated the process of mortgage loan issuance but also ensured the effective management of financial risk, thereby facilitating enhanced access to mortgage financing for a broader segment of the population.

As previously mentioned, the most sought-after credit product among citizens is undoubtedly the subsidised social mortgage through the MLGF. These mortgages are particularly advantageous when purchasing homes in budget multi-family residential complexes constructed under the State Agency for Housing Construction (MİDA). More than 70% of apartments sold by MİDA have been purchased using subsidised mortgage loans facilitated by the MLGF. According to R. Abdullayev, since 2018, the fund has provided subsidised mortgage loans to 4,802 citizens totalling ₼233.1 million, along with 82 conventional mortgage loans worth ₼3.6 million for apartments sold by MİDA. However, access to social mortgages and the purchase of apartments in budget-friendly new developments is limited to specific categories of citizens. Constraints on the state treasury limit the scope of these projects. In the 2024 state budget, a mere ₼87.7 million were allocated for mortgage lending. According to the budget approved by the Milli Majlis for 2025, an allocation of ₼100 million for social mortgages is anticipated next year.

Comparing Facts

Azerbaijan's mortgage loan interest rates have been a focal point in both the media and social networks, with discussions focusing on their competitiveness compared to other countries.

According to the fund, the maximum loan amount for conventional mortgage loans is set at ₼150,000 with a term of 25 years and an annual interest rate of 8%. For subsidised loans, the maximum amount is set at ₼100,000 with a term of 30 years and an interest rate of 4%. In determining these limits, the fund considers market price dynamics and target groups with low- and middle-income levels.  "Given the projected average loan amounts for 2024 and the requirement of at least a 15% down payment on residential properties purchased through mortgage financing from personal savings, these maximum loan amounts can be considered reasonable," stated fund officials.

Furthermore, despite annual property price increases ranging from 10-15% in recent years, the average loan amount for conventional mortgages was ₼89,700 in 2023 and rose to ₼98,700 in 2024.

In international practice, interest rates on loans are directly influenced by inflation levels, central bank rates, and yields generated in capital markets. Interestingly, mortgage interest rates tend to exceed those set by central banks. Given that mortgages are long-term financial instruments, "floating" interest rates (linking loan interest rates to inflation or other relevant indicators) are often used to hedge investor risks. While this approach offers investors a degree of flexibility, it can also impose additional financial strain on borrowers during periods of economic downturn. In contrast, Azerbaijan's mortgage system utilises fixed rates, ensuring that interest rates remain consistent throughout the loan term, regardless of economic fluctuations.

Notably, Azerbaijan's average annual inflation over the past three years has been approximately 8.13%, while central bank discount rates have ranged from 7.25% to 9%. Currently, annual interest rates on business loans stand at 10.6%, while consumer loans reach up to 16.3%.

In this context, since late 2006, a maximum interest rate of 8% on conventional mortgage loans issued from fund resources appears manageable, particularly given the average rate has been lower, ranging from 6.2% to 7.96% in previous years (with a rate of 7.45% recorded in 2024).

Azerbaijan's experience with mortgage lending, when compared to similar programs in post-Soviet countries, reveals several advantages inherent in our mechanisms.

First and foremost, recent digitisation initiatives within the country have significantly simplified the list of required documents, borrower assessment procedures, and overall loan processing. Since 2013, the fund has implemented an Digital Mortgage and Loan Guarantee system that encompasses the entire process, from application acceptance to loan issuance, including service tasks such as payment collection and insurance contract extensions. Integration of electronic systems with relevant governmental institutions' platforms enables all citizens employed under labour contracts to access mortgage loans according to their repayment capacity via a "single window" principle. Consequently, excluding time spent searching for housing, mortgage loan processing typically takes only 3-5 days. The list of documents required for loan processing could theoretically consist solely of an identity card, as most other entities that issue documents are integrated with the fund's electronic system under the umbrella of e-government.

Finally, a key concern is the stability of mortgage payments over time. While there have been instances of such occurrences, mortgage lending is widely regarded as one of the most robust financial instruments in Azerbaijan. However, as with any financial instrument, there is a possibility of encountering unforeseen challenges. In such cases, the fund has been known to restructure obligations for borrowers. This is done to protect the rights of borrowers experiencing a decline in repayment capacity and to mitigate future risks for both credit institutions and borrowers in the event of unforeseen circumstances.

In summary, today's mortgage system remains virtually the only reliable means for acquiring housing for those unable to afford outright purchases. Given the sustained demand, it is anticipated that this system will continue to evolve and adapt to meet the needs of all stakeholders.