When issuing mortgage loans, banks will be required to buy an insurance policy for the borrower at their own expense. Moreover, they will have to insure not only real estate, but also the life and health of the lender and even the cost of medical examination. However, mortgages for citizens will not especially fall in price, since new expenses will be included in the interest rate on the loan. But the procedure will become more transparent - the borrower will find out the full cost of the mortgage immediately, and not when signing the documents, as is happening now. This means that it will be able to fully compare the offers of different banks.
The Bank of Russia has unveiled a new concept of mortgage insurance, developed in pursuance of the President's order to take measures to reduce the cost of mortgage loans. Insurance costs are one of the components of the total cost of a mortgage and often significantly increase it. At the same time, citizens are forced to pay not only the insurance product itself, but also the agency's commission to the bank for the promotion and sale of insurance policies of a particular insurer, which can reach 40%.
How it works
Now, according to the Law on Mortgages, citizens are required to insure the acquired property. Most often, you also have to buy insurance against accidents and illnesses: it is not obligatory by law, but in practice banks reduce the interest rate when it is issued. The borrower pays for the insurance costs.
A borrower can buy an insurance policy only from an insurer accredited with a bank, and most often, when choosing a company from this list, he is guided by the recommendation of a bank employee who is applying for a mortgage.
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As noted by the Central Bank, at present the Russian mortgage insurance market is quite concentrated. About 16 insurers are active on it. In 2019, they collected about 42 billion rubles under more than 8 million contracts. At the same time, the bulk of the contracts (more than 80%) were concluded by only five insurance organizations.
This situation is a consequence of the existing concentration of the mortgage market: 83% of the total number of existing agreements (4.3 million) is in the loan portfolio of the five largest banks.
According to the Central Bank's calculations, the rate on mortgage loans issued in 2019 averaged 9.94%, and the full cost of the loan (including insurance) was 11.41%. The actual cost of insurance is on average 0.74% of the amount of the mortgage, which is about 16 thousand rubles a year.
At the same time, the borrower cannot immediately receive information about the full cost of the loan. It is announced to him immediately before the conclusion of the contract, after the loan application is approved, the property is selected and the costs of processing all the necessary documents are paid. At the stage of choosing a bank for a mortgage, the borrower can only focus on the interest rate on the loan.
Who needs insurance
The insurance price does not change if the interest rate decreases, as happened, for example, over the last year due to the decrease in the key rate of the Bank of Russia. Thus, the share of insurance costs in the total cost of a mortgage is only growing.
The Central Bank notes that the level of insurance payments on mortgages is extremely low (in 2019, insurance payments amounted to only 3% of collected premiums on collateral insurance and 15% of premiums on life and health insurance) and most of the funds collected by insurers (85-97%) are sent to pay agency fees for the promotion and sale of insurance policies (most often it is the creditor bank), to cover operating expenses and to the insurer's profit.
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If desired, the borrower can purchase insurance outside the bank, avoiding the payment of the commission, notes the vice-president of the All-Russian Union of Insurers Viktor Dubrovin. According to him, the tariff for compulsory insurance of a property is on average 0.1% of the amount insured, which, as a rule, is equal to the amount of debt on a mortgage loan. Considering that the average size of such a loan is 2.5 million rubles, the cost of insurance will be 2.5 thousand rubles in the first year. In the second and subsequent years, it will decrease in proportion to the decrease in debt.
The tariff for voluntary life insurance strongly depends on the age of the borrower and ranges from 0.18% to 0.6%, that is, on average, about 7-10 thousand rubles in the first year. In some banks, the refusal of this insurance will not affect the mortgage interest in any way, in others it can increase the cost by 0.5-1%.
According to the same company "Ipoteka. Tsentr", the refusal of life and title insurance will lead to an inevitable increase in the loan rate on average from 2% to 7%.
The size of the agency commission varies greatly and can range from 10 to 40%, said Viktor Dubrovin. “This is logical, since a credit institution undertakes a certain job: to select an insurer, to form an insurance product, consultations, document circulation. Many banks undertake full cooperation on insurance, including participation in the settlement of losses,”he explained.
At the same time, it is the bank that is most interested in mortgage insurance, the Central Bank notes. When an insured event occurs, the money will go to him - to pay off the debt of the insured on the mortgage.
Borrowers, on the other hand, refuse insurance at every opportunity, even if the bank raises the interest rate - in some cases, the cost of insurance exceeds the savings on interest. In addition to mortgages, insurance contracts (of both property and life and health) are still extremely rare in Russia.
“In general, the borrower's interest is rather in minimizing such problems as choosing an insurance company, negotiating with an insurance company about the cost of a policy, drawing up and concluding an insurance agreement in addition to a loan agreement and participating in the process of settling the amount of insurance payment upon the occurrence of an insured event. An individual mortgage borrower rarely has a strong enough bargaining position to get the best price from the insurer or effectively participate in the loss settlement process in the event of an insurer's disagreement without outside help. For many citizens, these procedures are an unnecessary complication of the already stressful stage of life associated with obtaining and then repaying a mortgage loan, the Bank of Russia notes.
Will the mortgage become cheaper
The regulator expects that the conclusion of an insurance contract by the bank, and not by the borrower, will lead to its reduction in price. First, the bank insures a whole pool of borrowers at once and will be able to negotiate a lower cost of policies. Secondly, you will not have to pay an agent commission to banks, since the need to promote this or that insurer will disappear by itself. According to the Central Bank's calculations, if the proposed approach was applied, the cost of a mortgage in 2019 would be lower by 0.15-0.67 percentage points.
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However, even while discussing the new concept, the All-Russian Union of Insurers and the Association of Russian Banks sent a joint appeal to the Chairman of the Bank of Russia Elvira Nabiullina, in which they emphasized that “the cost of such insurance can only be compensated by an increase in the interest rate on the loan.” The Association of Russian Banks estimated the possible growth at 0.5-1 percentage points.
“Borrowers, unfortunately, will not benefit from changing conditions. The costs will be borne by banks, which will compensate them at the expense of the borrower, for example, by raising the rate. Interest rates on loans, taking into account the new mortgage insurance scheme, may rise by about 0.3–0.5 percentage points,”says Olga Bazhutina, General Director of Ipoteka. Tsentr.
It is still difficult to say how much the rate will grow, says Viktor Dubrovin. “The mortgage rate is a very competitive story and is constantly being targeted by the government. Most likely, there will be no direct transfer of the lost profit into the cost of the mortgage,”he said.
The All-Russian Union of Insurers believes that instead of shifting costs, the state should have formed a minimum standard for an insurance product and control the disclosure of all information to the consumer. And he himself will be able to choose which product and where to buy.
In turn, the Central Bank is convinced that "to maintain the current practice of paying by borrowers significant agency fees for the purchase of insurance policies in order to maintain a high frequency of communication with insurers seems inappropriate."
In view of the trend towards a decrease in the key rate, it may well be that the mortgage will not rise in price, says independent financial advisor Natalya Smirnova.
“It is likely that we can see the key rate of 4% and the conditions will not change, there will not be a significant rise in price. In addition, we must not forget that during the pandemic, banks faced a decrease in purchasing power, so now it would be unreasonable to raise rates too much, otherwise there is a risk of losing potential customers,”she explained.
What will the borrower get
Thus, in addition to property insurance, it becomes mandatory for citizens to purchase a life and health insurance policy. The concept specifies the minimum list of insured risks. For example, in property insurance, it is loss or damage as a result of fire, explosion, flooding, natural disasters, unlawful actions of third parties, structural defects. In life and health insurance - assignment of disability group I or II, death of the borrower as a result of an accident or illness.
Before the conclusion of the contract, the insurance company can send a citizen for a medical examination - at the expense of the bank, if the contract is subsequently concluded.
On the one hand, this is good, because in case of health problems, the insurance will cover mortgage payments, and in case of death, the family will not be under the threat of eviction.
“Borrowers will not be able to refuse insurance in order to save money, and as a result they will not find themselves in a situation where there is nothing to pay the mortgage with and the family may lose an apartment if the situation does not recover (mortgage vacations are not provided for a long time). And it turns out that the borrower is definitely protected from risks,”says Natalya Smirnova.
On the other hand, you will not be able to refuse insurance and you will have to pay it, sewn into the body of the loan, for many years until the mortgage is repaid in full. True, the cost of insurance will be distributed and, accordingly, not so noticeable. Now it is paid once a year, plus mortgage payments, and such expenses are usually budget-sensitive.
Now, with early repayment of the loan, part of the insurance can be returned, minus the remaining number of months and insurance commissions. Or you may not return it, then the policy will be valid until the end of the paid year. Now, since the cost of insurance will be distributed similarly to the interest on a mortgage, it will automatically terminate with the last early payment.
Since the price of insurance will immediately be included in the interest rates on the loan, it will become easier for citizens to compare the full cost of the mortgage in different banks. And this is perhaps the only real plus from the reform.
