We took out a mortgage at the beginning of 2021 at a still relatively low rate of 6.1%. In difficult times, when sanctions against banks are imposed fromabroad, banks will naturally need additional income.
In addition, there was news that Russian banks for the time being – until June 30, 2022 – will not be limited in what rates on loans to offer to the population. This measure was sanctioned by the Bank of Russia.
Can a bank unilaterally raise the rate on the current mortgage and, consequently, the amount of the monthly payment, citing the difficult economic situation and sanctions?
Your question is both simple and complex at the same time.
According to the law, the established judicial practice and the practice of concluding loan agreements, a bank cannot unilaterally increase the interest rate on an issued loan if there are no conditions for this in the agreement itself or the law.
However, the economic situation is developing in such a way that it is difficult to predict it. For example, the government may change laws in case of hyperinflation or to support the financial system.
Back in 2021, the Central Bank published a report with measures to regulate floating mortgage rates , as it understood that due to an increase in the key rate, banks would more often offer such conditions to borrowers. The authors of the report recommend banning floating rates or limiting their limits or the share of such loans in banks’ portfolios. But there is no official decision and laws in this regard yet.
I’ll try to talk about the options that I can imagine.
If the rate is fixed in the contract
In most loan agreements, the rate is fixed. This means that according to the law, the bank can reduce the rate on the loan unilaterally. And in order to increase it, it is necessary to sign an additional agreement with the borrower to the contract. But to sign such an agreement or not is up to the borrower.
The second option for raising the rate is a court decision. This happens if the borrower violates the terms of the contract, for example, regularly delays payments. In this case, the bank will not necessarily terminate the agreement – it may demand in court to increase the rate on the loan. Although this is a rare case.So what? 04.03.22
The third option: the bank can unilaterally raise the rate if the borrower does not fulfill the obligations under the contract, for example, his life or property is not insured. This is a standard condition of loan agreements.
Theoretically, banks can provoke a breach of these obligations by the borrower. For example, to increase the cost of insurance, and then, in case of violation, try to raise interest rates on loans. But in any case, the amount of the changed rate must be agreed upon in the contract.It cannot be arbitrary or be higher than the maximum specified in the contract. That is, if the upper limit of the rate in the contract is 8%, then the bank cannot arbitrarily raise it to 20%.
If the contract has a floating rate
With such agreements, the situation is different.
A floating rate is an agreement between the borrower and the bank that, with a certain change in conditions, the rate will change. That is, we are not talking about a unilateral change on the part of the bank.
How floating rate works. Typically, the floating rate consists of a base rate, which is guaranteed for the entire period of the contract, and a variable part – it is calculated using a formula that may include various indicators, for example, the key rate of the Central Bank of the Russian Federation, Mosprime – an independent rate of ruble loans and deposits on the Moscow stock market, Libor — the London interbank offer rate in the interbank lending market.
The share of mortgage loans linked to economic indicators is small. Over the past decades, the banking system has worked quite stably. The bank could link the rate to different indicators, but it would be difficult to compete in the market with other banks that did not do this. Clients simply opt for more attractive terms because they don’t want to take the risk of a rate increase.
If the loan agreement provides for a change in the loan rate depending on fluctuations in the key rate or other indices, then there should be a limit to change this rate.That is, it is not enough to simply write that the bank can adjust the rate if external conditions change. Be sure to need a formula, scheme or the values of the upper and lower limits of the rate. Otherwise, this condition in the contract can be challenged, since it violates the rights of the borrower: it allows the bank to change the rate arbitrarily, without prior agreement with the borrower.
In Tyumen, the company took a loan from a bank and signed an agreement, where there was a clause that the bank had the right to change the rate if the refinancing rate was adjusted. When this happened and the rate was increased, the bank tried to increase the rate on the loan. The company disagreed and went to court.
The court ruled that “from a literal interpretation of the text of the agreement it is impossible to establish the procedure for determining the interest rate when the refinancing rate of the Bank of Russia changes and the upper limit of a possible increase in the interest rate.” The court found the terms of the loan agreement to increase the interest rate uncoordinated and unconcluded.
The jurisprudence is clear. The borrower is subject to consumer protection law: no terms of the contract can be changed if they worsen the position of the borrower in comparison with the rights under the law.
At first glance, this seems to be a contradictory construct. It seems that the law says that it is impossible to change the rate unilaterally. But if you provide for workarounds in the contract, for example, linking to different indices, and describe in detail the conditions and sizes of rate changes, then it seems to be possible. This would not be considered a unilateral rate increase, as the borrower and the bank agreed by mutual agreement that this was possible.So what? 01.03.22
It is difficult to say how the court distinguishes the condition for unilaterally raising the rate from the conditions that the court recognizes as an agreement between the parties. Every litigation is different.
The main conclusion that can be drawn:if there is no indication in the loan agreement that the loan rate may change due to an increase in the key rate, and at the same time there is no formula that regulates the limits for changing the rate, then there is nothing to worry about.The bank cannot change the rate unilaterally, and if it tries, the court will recognize it as illegal.
What will happen to mortgage rates?
For owners of preferential mortgages with government subsidies, the risks are higher.
For example, under the terms of a rural mortgage loan agreement, the state subsidizes the key rate. The agreement states that if the state refuses to subsidize, then the preferential rate may change to the base one. The base rate is determined by the terms of the agreement – this is a preferential rate plus the key rate of the Central Bank.
If the federal budget runs out of money to finance the program, then rural mortgage holders will be forced to pay interest at a rate of 22.7% per annum
So far, the state is not talking about ending subsidies, which means that banks have no reason to change rates on loans issued.
What is the result
If a certain rate is specified in the contract, then the bank cannot raise it unilaterally. Most mortgage loans are issued at a fixed rate.
Holders of floating rate mortgages have a risk that the interest rate will rise. However, there is no guarantee that these conditions, laws or jurisprudence will not change in the current situation. So, on February 28, 2022, the president instructed to keep interest rates on all issued mortgage loans , but so far this has not been formalized into a regulation, decree or instruction of the Central Bank of the Russian Federation. We will follow the news.