The government and Mongol Bank tapered the interest rate of the mortgage program to an all-time low of 6 percent, effective October 1, in an effort to house “people with below average income”.
The new decision is the government’s first move to gradually reduce mortgage interest rate in line with the Government Action Plan 2020 to 2024, which targets to cut down the mortgage interest rate by four percentage points within the next four years. Six percent interest is comparatively lower than the central bank’s policy rate and target inflation rate. As a result of the interest cut, authorities estimate that around 2,000 families with monthly income of at least 900,000 MNT will get the opportunity to buy a decent home through the program. Preciously, families had to have a minimum monthly income of around 1 million USD to get decent housing.
Mongol Bank’s statistics indicate that 99,500 individuals have outstanding mortgage repayment of 4.8 trillion MNT. The sides plan to inject additional mortgage financing of 90 billion MNT into the program, 50 billion MNT of which will be provided by the government and the rest by commercial banks. The central bank has reserved 25 percent of its total financing for housing outside Ulaanbaatar and 15 percent for public workers.
Slashing the mortgage interest to 6 percent is certain to strip off financial burdens of families to some extent. Let’s say that an individual gets a 20-year mortgage of 100 million MNT after paying 30 percent down payment. This individual would have had to pay 585,508 MNT per month for an 8 percent interest mortgage. He/ she would have had to pay the bank 140.5 million MNT in principles and 70.5 million MNT – almost equivalent to the mortgage amount – in interests. But with a 6 percent interest mortgage, this person would have to pay 84,000 MNT less each month, specifically 501,502 MNT, and pay 120,400 MNT in principles and approximately 50 million MNT in interest. In other words, the interest cut saves people from debt burden of up to 20 million MNT.
Already, banks are packed with people to wish to inquire about and apply for a mortgage. Mortgage issuance was delaying in October as banks had to process previous applications and hadn’t received financing. By October 22, most banks, except Khan Bank, were awaiting for mortgage financing and were only accepting applications.
Mongol Bank reported on October 29 that just 221 individuals received 6 percent interest rate mortgages worth 15.8 billion MNT almost a month after the decision came into force.
This is not all. Some economists fear that the mortgage interest cut will lead to surged demand for housing and building materials and spike property prices, making it even harder for people to get a mortgage. When the mortgage program first launched in 2013, real estate prices surged by over 30 percent in just three years, which also lead to drastic swings in building materials. As the central bank was printing money for the housing program, Mongolia faced severe tugrug depreciation back then.
The government managed to exit the price bubble in the real estate sector by gradually cutting down mortgage financing since 2017. However, this made housing less accessible, caused a slowdown in housing sales, and led to housing surplus. From this point of view, the government should take swift action to prevent a replay of these challenges. Unless it shields the real estate sector from artificial demand and price spikes, lowering the mortgage interest rate to 6 percent could result in the opposite of what it aims to achieve and make it even harder for families, especially young couples, to access affordable housing.
Mortgage interest slash sparks various rumors
Since Minister of Construction and Urban Development B.Munkhbaatar announced the 2 percentage point cut to mortgage interest rate, many rumors and false information have been swaying the public.
A bank worker had told a person that people who have paid off their 8 percent interest mortgage loans are not eligible for the 6 percent interest mortgage. There was a rumor that people above the age of 35 automatically cannot obtain a government-backed mortgage. Mongol Bank rebutted these rumors, saying, “No such changes have been made to the mortgage procedure”.
In reality, most banks abstain from giving out long-term loans to people above the age of 40 on account of the risks that follow. In particular, banks view that issuing a 20-year loan to people over 40 is too risky as this age group are likely to struggle in repaying their mortgage once they retire. However, the mortgage procedure doesn’t specify a maximum age limit and this issue has more to do with the requirements of banks and their risk evaluation.
“According to the procedure, mortgages will be issued to Mongolian citizens with legal capacity aged above 18. You should interpret this as an adult who is employed. This type of rumor might have started due to credit risk-based requirements set by banks for borrowers. Everyone knows that it’s difficult to give out a 20-year loan to a 60-year-old just because they have legal capacity. In any case, the procedure doesn’t have such age restrictions,” explained Ts.Bayarbat, head of the Policy and Planning Department of the Ministry of Construction and Urban Development.
Most of the requirements of the 8 percent interest mortgage applies to the new mortgage program. One of the main changes is that the program no longer demands a co-borrower. According to the amended mortgage procedure, the primary borrower should not be currently repaying a mortgage with 8 percent interest rate or be included in the government rent-to-own housing program.
Another incentive in the new program is that any housing linked with central infrastructure in Ulaanbaatar are now applicable for 6 percent interest mortgage, which is expected to increase housing opportunities.
8% interest mortgage holders angered by exclusion
A large number of mortgage holders have been showing strong disapproval of exclusion from the 2 percent interest cut to the mortgage program as they are not entitled to an interest rate cut or transfer to the lower interest mortgage.
Though they haven’t holds protests and gatherings, many people who took out an 8 percent interest mortgage are expressing their frustration through social media and demanding the government to cut down their interest payment as well.
In particular, those who got their mortgages in September this year are most vocal and feel that the decision was unfair. In September, 1,052 people got 8 percent interest mortgages amounting to 77.3 billion MNT.
Back in 2013, the government lowered mortgage interest rate of previous borrowers to 8 percent to help lessen the burden. But this will not be the case this time.
Ts.Bayarbat stated, “The interest rate will not be changed for previous mortgage holders. If the financial source is used to refinance the 8 percent interest mortgages and turn them to 6 percent interest mortgages, the balance between demand and supply will be lost. It could lead to economic recession. Those with the 8 percent mortgage have already gotten their home. But there are many people who wish to get proper housing with a mortgage. This new program is dedicated to these people, not for those who already got the loan. If a person with an 8 percent interest mortgage repays their outstanding balance, they can apply for a 6 percent interest mortgage. The government is upholding a policy to support people without outstanding loan or property.”
Employment needed for borrowers
Young people and young families are the main target of the mortgage program. Yet, fewer young families have been getting mortgages in the last three years while increasing number of older couples have been getting mortgages.
Records show that people between the ages of 18 and 25 and those above the age of 65 are getting the least amount of mortgages. Banks usually reject mortgage applications from seniors in consideration of their age, ability to work and income. On the other hand, young people are growing less interested in buying a home as they wish to advance their studies, build a career and marry later. However, the biggest reason they are not getting mortgages is connected to their employment and financial situation. As most have just graduated from school or university, they often don’t have much savings or a stable job. To increase mortgage holders of this age group, experts advise providing adequate support to improve their employability, which would increase their savings and interest in buying a home regardless of the mortgage interest rate.
Another interesting statistic related to mortgage holders is that in the last three-and-a-half years, the number of mortgage holders with stable income has grown by over 5,000, while the number of self-employed mortgage holders rose by merely 1,100. According to sources familiar with the issue, many self-employed individuals are starting to voluntarily pay social insurance premium to qualify for a mortgage.
Regarding this issue, economists recommend the government to correlate the economic environment with the mortgage program and financing to improve access to mortgages, increase mortgage issuance and speed up the housing process.
One economist said, “If the business environment improves and people who are self-employed or run a family business are able to expand their business, their standard of living will get better and this will motivate them to buy a home. This will increase demand for housing.”
