Mortgage – yea or nay?
- By Dulguun Bayarsaikhan -
- Jun 28,2020
The Mongolian dream is to have a nice car, big house and live without worrying about your children’s school tuition or any other financial matters. The biggest hurdle to cross over is buying a home for the average Mongolian, but if you’ve been saving up now is the time to strike.
The government and Mongol Bank are issuing a total of 240 billion MNT in mortgage financing until the end of the year, half of which will be provided by commercial banks. Almost all commercial banks in Mongolia will be in on this plan, including Khan Bank, Trade and Development Bank, Golomt, State Bank and XasBank, which have the most customers.
A few changes have been made to the mortgage requirement but nothing major. If you’re a newlywed or a young man or woman planning to live independently, housing under 100 million MNT is probably what you’re looking at and that’s exactly what the higher-ups are planning to finance through their mortgage program. It’ll be even more advantageous if you’re a government worker, have stable income, or eyeing a home outside Ulaanbaatar.
Under the new requirements, 25 percent of Mongol Bank-funded mortgages must be allotted to people who wish to buy an apartment or khashaa baishin (a small to medium-sized property separated by fences from surrounding properties), while 15 percent must be designated to public workers.
Moreover, the government allowed struggling mortgage holders to stop paying off their loan for six months from May to October to relieve some of the financial burden caused by the ongoing global COVID-19 pandemic. According to latest reports, more than 52,000 mortgage holders have requested an extension. This is more than half of the approximately 94,000 mortgage holders in Mongolia and if all of their requests are approved, the government’s mortgage program with eight percent interest will lose most of its revenue generated through repayment. To get back on track, the government will need to take a decisive action and new mortgage issuance might just be the way.
90% of mortgage applicants are aged 22-43
People have been actively seeking a mortgage over the years. Last year, 11,680 individuals landed mortgages amounting to 861.9 billion MNT, according to Mongol Bank. While the number of new mortgage holders rose by 1,800 people, the amount of issued mortgages surged by 134.1 billion MNT year-over-year.
A research titled “Study on People wanting to Buy Housing with Loan” was conducted by mongo.mn, an online financial advisory and information center, over the past year. Its results indicated that 90 percent of people hunting for an apartment, house or khashaa baishin are between the ages of 22 and 43. This shows how important housing has become for people in the prime of their life. On the other hand, 55 percent of Mongolian adults are aged 22 to 43 and they desire to have a home of their own.
The survey revealed that on average, people wish to buy an apartment costing 73 million MNT or a khashaa baishin valued at 27 million MNT. Unfortunately, only 17 percent of them meet mortgage requirements. The situation is worse for those seeking a loan for khashaa baishin – just nine percent of them are fully eligible for a loan.
What’s causing people to fail mortgage requirements?
The biggest challenge people applying for a mortgage face is getting adequate down payment, followed by having sufficient work history, adequate monthly wage and providing proof of income.
Mortgage requirement includes:
• 30 percent down payment
• Employed at current workplace for at least 1-2 years (the self-employed are required to be running their business for the last 1-2 years)
• Debt-to-income ratio at 45-55 percent
• Proof of income – payment of social insurance premium and taxes
According to the survey, one in five applicants are able to pay the 30 percent down payment required for an 18 percent interest rate loan for a khashaa baishin, while the rest, or 80 percent, of applicants need an average of eight more months to scrape up enough money for down payment. If the down payment benchmark is lowered by a third to 20 percent, the number of eligible people will increase by 2.6 times, and twice higher number of people would be able to get a loan, according to the survey report.
Authors of the survey recommended banks and financial institutions to look into the impact of lowering the annual 18 percent annual interest rate for khashaa baishin loans, particularly its influence on the amount of interest people have to pay, and whether more or less people will want this type of loan.
How large of a mortgage can you get with current wage?
Getting estimation for the amount of mortgage you can get will help you choose the best housing for you and raise your chances of getting approved for a mortgage.
You can do this by either meeting an economist working at a bank, preferably the bank that you get your wage through or frequently go to, or doing some simple math. First, you need to figure out how much you earn a month and if you’re getting a mortgage with another person, you can add their income to yours. However, you need to prove all of these incomes so make sure you get documentation for your wages or deposit it to your bank account as soon as you get them. Most local banks set debt-to-income ratio at 45 to 50 percent. In other words, they will allow you to get loans that are no more than 45 to 50 percent of your income.
Let’s say you earn 1.2 million MNT a month after taxes. Forty-five percent of this amount is 540,000 MNT – the amount you can afford to pay a month on loan repayment. Then, multiply it by 12 (12 months in a year) and by the mortgage term. You can add your joint borrower’s income using the same method. Another thing to mention is that the amount you can borrow can decrease if you have any other loan.
Instead of these calculations, you can check out the table below to get a rough idea about how much you need to earn to buy your desired home through the eight percent interest mortgage program. It will also show you the highest amount of mortgage you can get depending on monthly wage, appropriate housing prices, required down payment and monthly repayment amount.
As soon as you’ve saved up enough down payment and checked all the boxes in the mortgage eligibility test, you would assume that everything would go smoothly. Even when you get a call from the bank telling you that you’ve got the “approved” stamp on your mortgage application, there’s still more to do. You won’t get your dream home just yet.
Most people usually scrape together everything they have to pay the mortgage down payment, but the mortgage journey comes with more expenses. I’m not talking about the monthly repayment and interest – I’m talking about the money you need to get documents notarized for contracts with the bank and home owner, register the apartment/ house under your name at affiliated district or province, loan services fee, and home insurance among other miscellaneous expenses.
Not many people know about this but until you get the mortgage contract on your hands, there’s a lot to do. Banks usually charge 50,000 MNT as service fee to approve a contract for a loan of 25 million to 100 million MNT in addition to lending service fee, which normally amounts to 0.5 percent of your loan. You have to pay collateral fee, which is a fixed 6,000 MNT. Home insurance is mandatory for a mortgage and this consists of two types of insurance – property insurance (0.3 percent of property value) and loan protection insurance (0.3 percent of loan). Mortgage holders are required to pay this amount once a year until their mortgage is paid off.
Other miscellaneous expenses can include costs for getting your ID card and other documentation scanned, fee for getting a government reference on your history of mortgage loans, notary fee (which can run quite high depending on your arrangement) and etc. So make sure to do your research and be prepared for all of these hassles before going to the bank.