Mongolia to Cut Mortgage Rates to Support Middle Class Growth

Mongolia’s central bank plans to cut interest rates on mortgages by almost half to 8 percent from around 15 percent this month, following a new policy approved by the government to ease financial burdens on the middle class.

The new mortgages require a down payment of 10 percent to 30 percent and must be paid back in 20 years, the Bank of Mongolia’s Chief Economist Sandagdorj Bold said yesterday in a telephone interview. The loans are valid for apartments smaller than 80 square meters (861 square feet), qualified applicants must have a full-time job, and monthly payments cannot exceed 45 percent of the family income, he said. The policy goes into effect on June 17.

Mongolia is experiencing double-digit growth and new job opportunities in the mining industry and its supply chain are building a middle class that is in need of housing. The strongest demand is in Ulaanbaatar, where half the city residents live in unplanned neighborhoods called “ger districts,” which lack infrastructure such as running water and central heating.

“The intended purpose is to support the middle class and support the long-term sustainable economic growth by increasing the savings of the middle class,” said Bold, adding that the 8 percent figure is meant to track the Bank of Mongolia’s target rate for inflation. “It can vary plus or minus one percent depending on performance of the inflation.”

Bank Lending

Outstanding loans in Mongolia are 900 billion tugrik ($630 million), said Bold. Certain qualified homeowners can try to refinance their bank loans, if their income falls within a certain level. Bold called the level a “middle-class income,” without providing specific figures.

The 14 percent to 16 percent interest rates that home buyers have been willing to carry “shows the real potential of bank lending in the financial market and the capability of lending the mortgage loans,” said Bold. “This is the reality of the Mongolian financial system. The market decided the interest rate.”

The new lower rates represent “a profound positive on several fronts,” Nick Cousyn, chief operating officer at Ulaanbaatar-based brokerage BDSec JSC, wrote in a note to investors. “Fixed housing expense will increase disposable income, which will be spent in the local economy, growing GDP.”

Growth Prospects

Mongolia’s gross domestic product may rise 13 percent this year, the World Bank said in April. Mongolia, a country of almost 2.9 million people, has some of the world’s biggest undeveloped mineral reserves, including Oyu Tolgoi, a copper and gold mine, and Tavan Tolgoi, a coal deposit.

The lower interest rate could help adsorb the increasing number of vacant units outside the city center and will also help to modernize the ger districts, said Cousyn. These neighborhoods, named after the traditional felt-covered yurt used by nomads, are the main source of smoke in winter that has made Ulaanbaatar the world’s second-most polluted city, according to the World Health Organization.

“The ger districts will begin to disappear as the government pushes incentives like this, while encouraging builders to begin to develop the ger areas,” said Cousyn.

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