The raising of a mortgage from the bank is often the only way for coming into possession of a home. There are two types of home loans in Moldova: “First House” and the classical mortgage. Economic experts say the program “First House” invigorated the lending market and also the building sector. Even so, the banks during the past year reduced the loan repayment period from 20-25 years to 7-10 years for “First House” and this diminished the attractiveness of these loans. The reason for such a move is the fact that the banks are running out of long-term funds. IPN’s reporter Sabina Rebeja discussed the mortgages and consumer loans and the socioeconomic effects of these loans with Dumitru Pîntea, economic researcher at the Independent Think Tank “Expert-Grup”.
Fewer mortgages before bank fraud
Dumitru Pîntea said that before 2016, which is before the bank fraud and the reforms done in the banking sector, the financial system wasn’t really accessible to private individuals as this was controlled by particular interest groups that financed primarily their activity or the activity of affiliated economic groups through the financial system. The given groups considered the financial system a mechanism by which disposable resources were collected from the population and firms, through deposits, and they later financed their activity, not being interested in releasing loans to private individuals or other companies.
Afterward, following the done reforms, particular loan concentration limits were imposed. The banks can no longer release a large number of loans to the same companies or groups of affiliated companies. Consequently, the banks had to look for other clients. This way, starting with 2015-2016, the banks began to more actively provide loans to private individuals through mortgages and consumer loans. On the one hand, the private individuals appear to be the most reliable clients when it goes to repayments. On the other hand, there are constraints generated by the Basel III regulatory framework, which prevent the banks from lending without solid security capacities. Therefore, these two types of loans increased in share since 2016 to about 30% of the total bank loans.
In the period, microfinance companies appeared and these provide consumer loans rather than mortgages. The demand for and supply of consumer loans increased a lot due to a number of factors, such as the decline in interest rates, increase in the disposable incomes and the financial institutions’ interest in this type of clients that are usually more disciplined and repay on time so as to avoid over-indebtedness.
Difference between consumer loans and home loans
The consumer loans and home loans are fully different, primarily by the repayment period. A consumer loan is repaid during several months or during over a year, while the mortgage during 20 years and more.
The mortgages were undoubtedly accelerated by the state program “First House”. However, when the program was launched, the fact that the banks do not have sufficient long-term funds and the deposits they attract are seldom repayable in over two years was ignored. The loans within the “First House” are repayable during 20-25 years. In other countries, conditions are first created for long-term sources of finance to circulate through the financial system, such as the creation of private mandatory pension funds. Such a practice was used in Romania, when a governmental program like the “First House” was instituted together with the creation of the Second Pension Pillar. In the Republic of Moldova, this wasn’t done and the banks as a result swiftly used up the long-term finance.
The banks are obliged to respect particular prudential indicators, such as long-term and short-term liquidity. At some of the banks, the long-term liquefy ratios are close to the limit and these banks cannot release loans repayable in 20 years, for example. As a result, these banks adjusted their mortgage offers for at most 8-10 years. The banks placed limitations themselves. The program remained the same. The bank must meet the prudential requirements and has to adjust the offer so as not to endanger depositors’ funds.
Another factor that led to the reduction of the repayment period for “First House” loans is the very great uncertainty, especial amid the COVID-19 pandemic. The banks practically do not finance the real economy with investment loans for 5-6 years as most of the resources went to provide loans within the “First House” or other mortgages. Most of the loans released now are repayable in one-three years, but this is insufficient for enterprises. As a secondary effect, the “First House” program led to the acceleration of classical mortgages as a person who does not meet the conditions of the “First House” is offered to raise the standard mortgage. With the “First House”, the state mobilized the population’s interest to take loans. But the conditions there are different as there is no state guarantee and the interest rate is higher.
“First House” or another type of loan
If the persons meet the conditions for the “First House”, this type of loan is more advantageous for them as the interests rate is lower and the monthly payment is smaller.
The diminution of interest rates was a factor that accelerated mortgages. In 2015, the interest rate was higher, of about15%, and the people preferred to live in rented accommodations more. Now the interest rates on loans are comparable with the monthly rent. With an interest rate of 7%, for example, like within the “First House” program, you pay practically the same sum monthly either you buy an apartment or rent accommodations. In the first case, the dwelling becomes your possession, while in the second case it does not.
Interest rates on mortgages are the lowest ever
The interest rates on loans are now the lowest ever in Moldova, but one should bear in mind that the average inflation rate targeted by the National Bank is of 5%. Respectively, 7% is a relatively low rate for an eventual inflation rate of 5%. In such a case, the real interest rate is of only 2 percentage points and lower interest rates on mortgages cannot exist for now. The interest rates were lowered owing to COVID-19 and the National Bank’s interventions, but this is a short-term effect.
Another effect of the mortgages is that the pace of construction works and the demand for apartments were maintained the past few years. In 2014-2015, all the new apartments were bought with the full amount paid at once, but now these are purchased mainly on credit. This kept the residential sector active and a lot of building companies afloat, concluded Dumitru Pîntea, economic researcher at the Independent Think Tank “Expert-Grup”.
