Azerbaijan's Costly Mortgage System

Six years after mortgages were introduced in Azerbaijan, the two-tier system designed to help the less-well off is failing almost everyone, and the central bank is promising reforms to make buying a home more affordable.

Under a system set up in 2005, public-sector employees are eligible to apply for “social mortgages”, at a relatively low annual rate of four per cent. The downside is that they have to repay the sum within four years, and they can only borrow up to 35,000 manats, around 45,000 US dollars.

The ceiling severely limits their options, as the money will buy a two-room apartment on the outskirts of the capital Baku, but nothing further in.

This leaves many buyers forced to turn to the standard mortgage type, repayable over 25 years. But this comes with a ceiling of just 50,000 manats, and the rate is a crippling eight per cent. Furthermore, only people on an income of over 700 manats a month can apply, pricing most out of the market.

The money to underwrite mortgages comes out of a common pot, the State Mortgage Fund, and the commercial banks that sell them cannot vary the uniform set of terms and conditions.

Vugar Jafarov, a young engineer, borrowed 40,000 manats at the higher mortgage rate to buy a flat in central Baku,.

“The main problem is that half of new-build homes don’t have title deeds, which means they aren’t eligible for mortgages,” he said. “That limits my choices as a buyer.”

The application process was complex, he said, explaining, “I used my connections and friends to get through the approval process and obtain the paperwork the bank asked for, and it still took me 15 days.”

Jafarov came up with a 20 per cent deposit for the purchase, and paid out two per cent of the final price the estate agent plus 1,200 manats in various other expenses. He noted that the deposit of 15 to 20 per cent, depending on which bank was giving the loan, would deter many potential buyers.

“However, I don’t regret taking out a mortgage, as bank loans are very expensive,” he added.

Vugar Bayramov, an economist from the Centre for Economic and Social Development in Baku, said mortgage rates in Azerbaijan were much too steep.

“If you take out a loan of 50,000 manats, you will repay two-and-half times that sum, or 125,000 manats, over 25 years. That’s is a huge sum. In Europe, the maximum rate for mortgage is four per cent, and in Turkey it’s 3.7 per cent,” he said.

Bayramov said the cost of mortgages was beyond the means of most Azerbaijanis, and called for changes to make them more accessible. The minimum wage level required for an eight-per cent mortgage was twice the national average, while getting a social mortgage required applicants to go round large numbers of government offices to complete the paperwork.

As one practical step, he suggested raising maximum loan amounts for both types of mortgage.

Rashad Orujov, director general of the Central Bank of Azerbaijan, which oversees the mortgage system, agrees that the system needs to change.

He told reporters on October 22 that the central bank intended to simplify the requirements for getting a mortgage, and to raise loan ceilings to a level that would make homes affordable.

“Normal mortgage loans will go up to 100,000 manats and social mortgages to 60,000 manats, so as to be in line with the market prices for housing,” he said.

Orujev also said he would like to see lending rates go down, although he did not name a target figure.

As it stands, some people find the mortgage system so off-putting that they go elsewhere for funding.

Samira Mammadova bought a flat on the outskirts of Baku by signing up to a credit deal with the construction company that built it. She is self-employed, and banks are reluctant to lend to anyone who does not have an employment contract.

“It’s very hard to get a mortgage from a bank – you have to pay a bribe to get a loan,” she said. “It didn’t work out for me, or for anyone else I know. The deal with the building company has terms that are a lot simpler, but the rate is higher…. all I needed to show was my identification card.”

Mammadova will pay dearly for her loan, which is for 22 years.

“If I’d bought the flat outright, it would have cost me 14,000 manats, but as it is, I will pay a total of 66,000,” she said.

Maharram Zeynalov is a freelance journalist in Azerbaijan.