For those who want to, but do not have enough money, many developers offer two alternative ways to buy an apartment. It is a question of buying an apartment in a new building in installments and a mortgage loan.
Installment is a way of buying an apartment, in which the buyer pays its value in fixed installments within a given period of time, and the transfer of ownership takes place after the last payment is made. The parties to this buying process are the buyer (investor) and the developer (or his proxy asset management company).
It is divided into two types of maturity – short-term and long-term. Short-term installments range from a few months (2-3) to 2 years, with an average of less than 1 year. Usually the terms of short-term installments provide for repayment of the apartment price by the buyer before the completion of construction and commissioning of the house, but nothing prevents from including the terms of short-term installments in the contract in the case of purchase of an apartment in the already constructed and commissioned new building.
Long-term installments are usually provided from 2 to 5 years and sometimes up to 10 years, and are finally paid after the commissioning of the new building. However, long-term sales are rarely used because of the economic disadvantage for the developer.
No additional documents are usually required to formalize the terms and conditions of the apartment purchase in installments; these terms and conditions are specified in the purchase agreement itself. However, the developer entering into such an agreement may require other documents that will confirm the solvency of the buyer (at the discretion of the parties, the law does not establish such a list).
For example, a certificate of income, but it is quite rare (because, firstly, under the terms of installments the buyer pays from 20% to 50% of the cost of the apartment as the first installment, which already increases the confidence of the developer in the reality of payment of the balance of payments.
Secondly, since installments are usually made before or during construction, the developer is extremely interested in the inflow of capital from the buyers, and sets the most liberal regime for obtaining installments.
Main advantages of purchasing an apartment by installments
- The design process. As already noted, the purchase of an apartment in installments is processed much faster than, for example, buying on credit. The terms of the installment (the amount of the down payment, payment schedule, interest rate, etc.) are prescribed in the contract of sale, the conclusion of additional contracts is not required, developers may also not require documents confirming the solvency or require them at a minimum.
- Minimum overpayment of funds. Since, in any case, the installments are granted for a shorter period than the mortgage loan, the final overpayment after the full repayment of the apartment is less. In addition, the interest in installments is usually less than on the mortgage (the most common rates: 1-5%) or they are not set at all.
- The shorter term of payment by installments. In the case of short-term installments, and even most long-term options, the repayment period is generally shorter than the loan.
Main disadvantages of installments
- Initial installment. As already mentioned, the first installment payment is between 20 and 50 per cent of the total cost, and for many potential buyers is a severe budgetary loss.
- Payment term and amount of payments. As already mentioned, the term of payment in installments is shorter, respectively, and the amount of monthly payments is greater than in the mortgage loan.
- The cost of square meters. The cost of payments for apartments in buildings under construction depends on the cost per square meter. The majority of developers do not fix such a cost in the contract in installments, and in the process of construction it may increase and, accordingly, increase the cost of the apartment and the amount of payments.
Lawyer of KopotLawyers Andrey Mikheev draws attention to the following risks when buying an apartment in installments:
- Do the terms of the contract provide for the possibility to move into the apartment and use it until the installment amount is paid in full?
- Does the buyer have the right under the contract to rent out the apartment or sell it under a preliminary contract before paying the entire amount of installments?
- What are the contractual penalties for late payment of regular payments?
- What is the interest rate base for the contract, if any? Rates can be set on the balance monthly or annually. Also, depending on payment schedules (annuity or decreasing), the final amount to be paid may also change.
- Availability of additional commissions and fees of the developer and the method of their calculation.
Buying an apartment in a new building on credit makes sense if the buyer does not have most of the cost of the apartment or no funds at all. If the apartment is purchased on credit, three parties are involved: the buyer, the developer and the bank (or other financial institution) providing the credit.
If the apartment is purchased on credit, two processes take place simultaneously: the buyer signs a loan agreement with the bank to receive funds for the apartment, as well as a mortgage agreement under which he transfers the acquired property as security for the credit obligation to the bank (but has the right to own and use this property).
The subject of the mortgage may also be the property rights to the object of construction in progress, that is, to the apartment in the house not yet built. “It is important that the rights that can be alienated may be transferred to the mortgage, that is, at the time of the conclusion of the mortgage agreement the buyer should have the ownership right to the apartment,” – said the lawyer, managing partner of KopotLawyers Vladimir Kopot.
Advantages of buying a home on credit
- Relatively small amount of the down payment and monthly payment, as the loan is provided for a long term (by law – at least 1 year, the maximum term can be up to 20 or more years). The bank is interested in earning on the interest paid by the buyer.
- The bank takes every effort to verify the reliability of the developer, as it is interested in the mortgaged property being built without infringement and on which it can be earned. The buyer can even first apply to the bank for a loan and get information about reliable and already checked developers.
- The total cost is fixed at the time of signing the loan agreement. After the entry into force of the Law of Ukraine “On Consumer Lending” banks are obliged to indicate the full cost of the loan, including interest, intermediary services, fees and charges, and can not hide anything and write “small print”, as it was before.
- You can buy an apartment without a large amount of money or without any money at all.
Main drawbacks of the mortgage loan
- Strict customer requirements on the part of the bank and the complex process of registration. To obtain a loan from the bank it is necessary to provide personal documents of the applicant (passport, code), documents confirming the marriage and the presence of children or their absence, documents on the property owned and its encumbrances, history of previous loans, information on income, registration and financial documents of the developer, etc. All these documents are checked within a few months, and the percentage of refusals to grant a loan is quite high.
- High overpayments due to interest and penalties and a long repayment period;
- A limited number of developers in whose projects the bank risks to grant loans.
- The inability to sell the mortgaged property and the limited ability to manage the income from renting out the apartment (due to loan repayment obligations).
- The Bank may mortgage your apartment itself (during the term of the mortgage agreement) to fulfill its obligations to its creditors, etc.
Also, KopotLawyers lawyers advise to pay attention to the following risks:
- Calculation of payments and date of their write-off. The contract should establish a clear schedule of payments indicating the amount of interest rate and the date of writing off the amounts of payments on the borrower’s debt.
- Insurance. According to the legislation on mortgage, the mortgagor must register only the object of mortgage, but banks often require to insure both the object and the mortgagor, imposing an insurance package of their own insurance companies. Also, some banks impose penalties for non-extension of insurance, which is often not reported to the borrower.
- The procedure for collecting fines. Now the judicial struggle on consolidation of impossibility of collecting the accrued fines under the credit contracts under the executive order of the notary continues, however for today such possibility still exists according to the Resolution of the Cabinet of Ministers of Ukraine from June 29, 1999 № 1172. Therefore, the best option for the buyer would be the absence of such a clause in the contract.
So, of course, from the point of view of economic efficiency and simplicity of establishment of contractual legal relations for the buyer is more advantageous option of purchasing an apartment in installments.
In this case, the number of parties to the agreement decreases, and the developer, interested in obtaining capital from the buyer, is usually ready to make concessions to form a package of documents confirming the solvency of the buyer of the apartment.
From the legal point of view, the installment purchase also seems to be much easier, because there is only one contract of sale, in which all the conditions of installment are prescribed, and which must be notarized with the payment of fees established by law, while in the process of registration of the apartment in the mortgage is also subject to confirmation of the mortgage agreement, which increases the cost of execution of documents.
Statistics also show that installments are the most popular way of buying real estate today.
However, when purchasing an apartment by installments, the buyer has to bear the risks of verifying the reliability and integrity of the developer on his own, while the bank assumes the responsibility for verifying the loan.