Economy, Domestic Economy

New Mortgage Plan Pits Developers Against Lenders

New Mortgage Plan Pits Developers Against LendersNew Mortgage Plan Pits Developers Against Lenders

Having blown fresh wind into a much-delayed mortgage plan, the government is entering tough negotiations with real-estate developers, credit institutions and mortgage companies to hammer out the legal specifications.

Since its conception in 2009, a plan allowing mortgage companies to issue credit to home-buyers was shelved until a year and a half ago, when the Ministry of Roads and Urban Development finally sent the proposal to the Central Bank of Iran (CBI), which in turn forwarded the plan to the Money and Credit Council for the final approval.  

The plan, expected to be implemented in the coming months after the council’s approval, aims to fill the gap in the domestic housing market for non-bank credit providers. Bank Maskan is currently the sole specialized bank in the housing sector, providing mortgage loans up to a maximum of 800 million rials ($24,000 at market exchange rate) to first-time homebuyers at 14% interest rate.

The new mortgage plan is also seen as one way to give new momentum to the stagnant housing market by providing buyers with an additional funding option. However, there are also concerns that the plan would cause housing prices to skyrocket due to increased demand.

Supporters of the new plan argue that unlike other housing funds that target only the consumers’ needs and lead to increased demand in the market, the proposed mortgage plan helps stimulate both supply and demand by mobilizing more financial resources for the housing sector.  

In the proposal currently under review by the Money and Credit Council, up to 70 percent of the house value would be paid by the mortgage company, with the remaining 30 percent directly paid down by the buyer. The mortgage companies agree to lease the property to the buyer, in a somewhat similar system as rent-to-own transaction. The buyer would take full possession of the property after paying off the mortgage in 5-12 years.

As Deputy Roads Minister Hamed Mazaherian said on Sunday, the Money and Credit Council has not yet reached a final decision on the interest rate.

The council earlier put the bar on interest rates at 21 percent, which sparked controversy among mortgage companies and real-estate developers. While mortgage institutions point out that credit can only flow with interest rates of 24 percent upwards, estate developers argue that buyers will not participate in a scheme charging rates above the current inflation rates.

On the one side, mortgage institutions are similar to credit institutions in that they can offer credit without the levels of compensating equity held by normal banks. This is reflected in their risk calculations, forcing these institutions to set interest rates higher than other financial institutions.

Hassan Kalhor, head of Association of Iranian Leasing Companies, stressed that despite ongoing negotiations with the CBI, no final conclusion has been reached. Kalhor believes that rates of around 25 percent rates are appropriate, arguing that: “Currently, some credit institutions give out loans to house developers with a return of 35 percent. Therefore, a good solution is to combine the financial resources of developers and mortgage firms to lower interest rates to 25 percent.”

Nevertheless, developers believe 25 percent is much too high. Demanding rates far above the inflation inhibits the sale of their properties to lower-income groups, they believe.

A proposal put forward by house developers last year stated that “the mortgage lending rate should be set at no more than the official rate of inflation, with an additional four percent margin to compensate for the credit institution’s labor costs.”

The CBI has set the inflation target for the current Iranian year at 14 percent. Under the developer’s proposal, interest rates would not exceed 18 percent.  

Advocates of the proposal have argued that this could also create healthy competition between mortgage firms as they could set return rates lower than inflation.