Mortgage insurance in the Russian Federation and in Europe: one definition, but different risks and meaning

Mortgage insurance is not always what it seems to us. Often, speaking about “mortgage insurance” we believe that this is the same thing in comparison with foreign versions. The situation is often found when even the insurers themselves are trying to compare tariffs that use domestic insurance companies when insuring mortgages with the proposals of foreign players in the market. The problem is that often we are trying to compare the incomparable: apples with oranges. Of course, this is not entirely so, it’s time to understand this definition. So what is mortgage insurance in Russia and abroad?

We decided to conduct a small review of the practice in this area, show similar features and differences, applying and risks, so that both market professionals and ordinary readers could more competently use this term and clearly understand its meaning:

• for professionals – to outline what the Russian and European products are, who they primarily protect and what risks are included;
• For “users” – to explain what risks are covered by domestic and foreign mortgage insurance.

Let’s start with simple definitions.

Mortgage and mortgage insurance

Let’s turn to WikipediA

A mortgage is a legal instrument which is used to create a security interest in real property held by a lender as a security for a debt, usually a loan of money. A mortgage in itself is not a debt, it is the lender’s security for a debt. It is a transfer of an interest in land (or the equivalent) from the owner to the mortgage lender, on the condition that this interest will be returned to the owner when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower.

In other words, mortgage is an option for buying real estate with debt on credit (more often from banks).

Mortgage Insurance is insurance of losses with creditors which may arise in the case of defaults of mortgage borrowers and the subsequent sale of the property.

The term “mortgage insurance” is restricted to this segment of credit risks and should not be confused with other types of insurance, accompanying the mortgage loan (property insurance, title insurance, accident insurance).

In Russia, these concepts were mixed and therefore it is worth discussing in more detail how it works.

I had to view and summarize a lot of foreign resources to prepare this material. We tried to make the review as easy as possible and clearer. It turned out that in open access, there are practically no articles and reviews that simply and clearly outlined this problem. It is important to note that “mortgage insurance” is only a “trailer” of a large locomotive called “Mortgage”.

Mortgage in Russia and in the world

Mortgage loans in Russia, according to official data, now occupy about 60-70% of all transactions in the real estate market. More importantly, the share of mortgages in the banking portfolio increased significantly in 2020-21,  in connection with the introduction of preferential lending programs (loan rates – 6.5-7%, according to some programs – about 5%). The share of primary housing purchased on credit increased more than 70%, especially by lower income earners and, in part, by middle income earners.

We have repeatedly discussed in our articles and reviews this topical subject. About a year ago, the average loan term was about 14 years, and the average period of repayment is 8 years. It is noted that recently the share of loans over a period of 25 years is about 20%, and the average loan term approaches 20 years.

We want to draw your attention to the fact that the “average cheque” on a mortgage loan increased in need either ‘to’ or ‘by’ here not ‘in’ about 3 million rubles in 2021, against 2.5 million a year earlier. The average monthly payment on mortgages has virtually not changed, however, the average term of the loan increased, and the “average mortgage apartment” remained the same. Why? In fact, the average market rise in housing prices amounted to more than 20% over the year and simply leveled a decline in the mortgage loan rate. We came to the conclusion that the average mortgage term in Russia approached global values.

For simplicity of understanding, we suggest comparing average mortgage loan rates:

• in Russia about 7%, (but the decline is associated with preferential mortgage)
• developed countries (for example, USA, Germany, France, United Kingdom, Australia) – about 2-3% (4% more rarely)

Minimum payment for obtaining a mortgage loan

• It is not fixed in Russia, it is usually 10-20%. However, in order to ensure the stability of this market (and avoid a mortgage bubble), it has been repeatedly discussed at the level of the country’s management to establish a minimum
• Occidentally not the correct word – 20% of the housing cost. That is, according to the government, the loan should not exceed 80% of the cost of housing.

It should be noted that mortgage programs in Russia are, first of all, programs for apartments. The average minimum initial contribution of the mortgage loan for a home is not 20%, but from 30% (since the liquidity of such objects under the general rule is considered significantly lower than on apartments).

In developed countries, the minimum payment for obtaining a mortgage loan is 20%, and the average loan fully corresponds to the word Mortgage – “to death” and amounts to more than 25-30 years – 80% of the value of the real estate.

However, even with such tough regulations, customers have the potential to buy real estate, having in their hands, say, only 5% of the total cost of an apartment or a home. To do this, it is easy to buy a “mortgage insurance” policy (or mortgage banking program with similar functionality).

Now we come to the main issue of our article.

Mortgage insurance in Russia: subtleties and who it protects

To get a general idea, we will analyze insurance in stages in Russia, and then in some developed countries.

Mortgage insurance in Russia: subtleties and who it protects primarily

Mortgage insurance in the Russian Federation – this is a conditional obligatory type of insurance, when buying a property on credit.

Classically, this category in Russia (according to the rules of insurance) is divided into three “subspecies”:

• insurance of the life and health of the borrower (from accident and disease),
• property insurance (as a rule, only the structural elements of housing),
• title insurance (real estate property).

Sometimes there are additional options, by the type of risk insurance from loss of work, finishing apartments, etc.

Usually, when purchasing an apartment on the primary market, the Bank requires the borrower to insure life and health, since there is no insurance object as such (there is only a share) and there is no ownership (only you will appear – at the client), so the insurance of the object and the title is not subr Only after registering an object in the property, as a rule, the Bank requires insurance of the object itself.

When buying an apartment (house) in the secondary market, in general, a credit institution requires the borrower to insure all three risks at once.

What amount is insured and how mortgage insurance in the Russian Federation is normally paid

In the Russian Federation currently there are no type forms of the mortgage insurance, although there are such discussions about what we have previously written in the article Mortgage “OSAGO” (third party liability insurance). This is reasonable, especially since the number of such new insurance  already numbers millions per year, and extension on the existing portfolios is an order of magnitude higher.

The insurance contract covers the entire validity period of the mortgage loan, however, the insurance premium is taken for one year, and the policy is also valid for only this period. Typically, the insured amount is the amount of the loan balance plus 10% (or, increased by percentage of the loan). The average mortgage loan in Russia exceeds 3 million rubles, while the average payment remains close to 20,000 rubles, due to an increase in the term of the loan, thereby increasing the debt burden for a longer period of time.

For information: the average life insurance premium is 0.3-0.4%, insurance of the property is 0.1-0.2%, title insurance 0.2-0.4%. However, there may be deviations in a large or smaller size of the tariff, depending on the degree of risk of a borrower, an insured object, transaction (when buying housing in the secondary market) as well as from the bank’s remuneration issued a mortgage loan.

Who is protected by the Mortgage Insurance Policy in the Russian Federation?

Of course, first of all, the credit institution. However, the borrower and his family are included. Because in the event of the death of the borrower, the insurance company, in fact the credit, is cancelled, and the property (home or apartment) remains in the family. Moreover, if the borrower paid the amount greater than the insurance amount (with a lead of the schedule), then the insurance company first extinguishes the debt of the borrower before the credit institution, and then the remaining amount is paid to the heirs under the law.

In the case where the title is insured and it turns out that the deal is negligible for reasons associated with the transfer of ownership (usually occurring within 3 years after the transaction, the so-called limitation period under the Civil Code of the Russian Federation), then the apartment can again, not minus from the family budget.

Insurance against insolvency on mortgages as such in Russia does not exist, however, in some cases the rules provide for payment of monthly repayments on the loan (more often than six months, by the type of “credit holidays”) when losing work. Dismissal Attention Invoice, these insurance is not considered as an insurance risk. However, these risks come into effect after not making repayments on the loan for 2 months, which will later have an adverse effect on your credit history.

Features of mortgage insurance abroad in developed countries

Mortgage insurance, most often, implies insurance not from risks of loss of life or the health of the borrower, as much as loss of property or property rights to the property, namely, default on the loan as well as the loss of property or property rights to the property, namely the default and insolvency of the client to the credit institution (bank).

Standard scheme, if the borrower has 20% for the “deposit” (the initial contribution to the cost of the house or apartment), then in this case it is not required to conclude a mortgage insurance contract. In addition, the monthly debt burden should not exceed 30-35% of your monthly income.

In case you have 5-15% for the first contribution from the value of the real estate object, there is a need to purchase a mortgage insurance policy (or a different mortgage program from the bank), which covers the difference between your contribution and the required 20% (In some cases up to 35%). Cases of death or loss of the real estate object are not covered by this Policy, but only the risk of a loan default is insured, ie if it is impossible to carry out regular loan payments to the borrower.

In the case of an insurance event, the property leaves a credit institution and it appears the opportunity to realize it not at a loss at least with a 20% discount. In fact, such real estate is sold off with a smaller discount on the market, which also gives good marginality for the bank, even in the case of a borrower default (provided there are enough steady prices for housing and more or less stable demand).

Moreover, in some countries, depending on the bank’s program, to buy an apartment (or home) with a mortgage, a life insurance policy may require an additional guarantee and / or guarantee from the parents of the borrower (guarantee of parental money). In the latter case, a Mortgage Insurance policy is usually not required, and in the case of a default, the parents will be forced to cover the difference up to the deposit of 20% of their savings on the bank account. In some cases (in some countries), pension savings may also be a guarantor of payments.

Usually with a low initial contribution for a deposit, mortgage insurance must be purchased for the entire validity period of the loan, and as a rule, with early repayment of the loan the balance of the amount The cost of such insurance against default can reach 2-5%, which is added simply to the mortgage loan.

It is important to note that this mortgage defense is not always implemented in the form of an insurance policy, according to some programs the bank itself provides such a service without an insurer’s agent.

Do not forget that in many countries there is a one-time tax when buying real estate, and broker services, which also makes up 2-5% of the purchase price, which is comparable to the services of realtors in the Russian Federation (2-4%).

In some cases, programs provide monthly payment of such insurance, and depending on the country, program and bank, payment can stop when a 20% contribution is reached, and in some cases the cost of real estate or full loan payment is continued.

Thus, first of all, the insurance of the mortgage protects the bank then the borrower and only on the risk of insolvency.

Insurance of the property itself for the most part is not required, or a minimum risk package is required. The cost of such insurance does not exceed 0.1% of the cost of the house per year. But good insurance protection, including flood insurance, hurricanes, floods, etc. usually exceeds 3-5%, which is significantly more expensive than in Russia. The standard property of property insurance fare Even with an extended risk package of houses does not exceed 1%, in rare cases 1.5-2%, which is significantly lower than foreign versions.

Tax preferences when buying housing with a mortgage

In Russia, and the difference, for example, from Germany, France and Australia, if you buy an apartment in a mortgage regardless of the acquisition goal (personal use or rental), you get standard tax deduction (article of the Tax Code of the Russian Federation)

• income tax refund within 3 years for the amount of real estate up to 2 million rubles (the right can be used only once in a lifetime),
• income tax refund for the amount of interest paid for the entire term of the mortgage loan.

The housing tax is, standard, 0.1-0.2% of the cadastral value of the object per year. To sell without confirmation of the value of your “income” and not even submitting a declaration is possible after 5 years of ownership of real estate.

In the above mentioned countries, tax breaks are given if you purchase housing for rent (for commercial purposes, and not for personal stay). Also with real estate, for the most part, it is necessary to own for more for than 10 years in order not to pay additional taxes after its implementation. In addition, real estate tax may be taken at the same time (depends on the country’s legislation) for the entire life and amount to several percent of the cost of the acquired real estate (usually 2-5%).

Comments and summing up.

Summing up, we want to once again draw your attention to that the definition of “mortgage insurance” in Russia and abroad have more often from the point of view of the mechanism of work, coverage, risks and advantages , minuses for borrowers. The essence of this concept is different, although it would seem, and implies, insurance protection when taking a mortgage loan.

We tried to summarize the approach of some developed countries on mortgage and mortgage insurance, so that our readers and professionals it is clear that it is impossible to simply compare the tariffs for insurance “there” and “here”, without taking it apart.

If you return to the beginning of our article, in fact in Russia – “comprehensive mortgage insurance”, and in Europe – ‘mortgage insurance’ is insurance against borrower default.

In Russia, in our opinion, more customer-oriented “mortgage insurance” has developed. Perhaps that this product is not enough, so this is insurance against the “default” of the borrower. Of course, Russian specifics and historical realities do not allow widespread deployment of such a program, due to the concerns of insurers of growth of fraud by customers and, as a result, the complexity of the correct risk assessment and tariffs.

In addition, the mortgage “default” insurance in the “Western form” of Russia is not enough, since modernization under the Russian “standard approach” is required (insurance for the entire amount of the loan), and not on the “reduction of the contribution” upon receipt of the mortgage. Already, the authorities are more than alarmed and discuss raising the minimum contribution up to 20% (as a kind of guarantor of the solvency of borrowers) in order to avoid the “influx” of the mortgage bubble and the risks of the delayed default population, and the introduction of the Western approach actually will take all these efforts to not.

It is worth noting that overdue mortgage debts in Russia in 2020 has already exceeded 8% and begins to grow to 10%; The loan period has increased. At the same time, the average monthly payment for such a loan remained at about the same level. All these facts speak not in favor of the improvement of the Russian economy.

We are confident that our article cleared a little, what is “mortgage insurance”, the difference between the Russian and Western approach. Should I take a mortgage now or wait – completely your decision! With our advice, we share in our articles and reviews so that you are always aware and have made careful and deliberate decisions.

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Article approved by expert insurance market Denis Lebedev

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