Mortgage: How to Properly Read a Credit Agreement

When it comes to bank credit agreements, many people have a persistent association with the cunning 'small font' in documents, which hides undercurrents capable of trapping any borrower into financial trouble. Our expert Maria Litinetskaia explains how to navigate a credit agreement.

Maria Litinetskaia is an expert and managing partner at "Metrium Group", a real estate brokerage and consulting company operating in the Moscow region and St. Petersburg.
1. Prepare for Your Bank Visit

In the era of information openness, it's wise to study the main terms of banking documentation in advance. Most banks post standard forms of credit agreements on their websites. You can find them by searching for phrases like "mortgage / credit agreement / bank." Occasionally, the standard form may not be available on the website, but someone might have already shared it on a specialized forum. 

If your search online yields no results, it is not inappropriate to contact your bank's credit specialist and request a template of the standard form on paper. The key term is "template," as the final agreement with your personal details will be drawn up just before the transaction.

Perhaps the main issue in thoroughly reviewing a credit agreement is the large volume of text, which often causes key points to fall out of view and leaves confusion in one's mind. Many banks divide the credit agreement into two parts: "General Conditions and Terminology" and "Individual Conditions."

Unfortunately, this method of organizing information can be dangerous. Some lenders like to refer to the offer agreement posted on their website, containing conditions that directly affect the main parameters of the deal, such as interest rate review or packages and tariffs of additional services related to loan servicing. These conditions can be changed by the bank without notifying the client, at any time and in any direction. 

Common issues include: the lender has the right to inspect the collateral property; the borrower must annually renew insurance of real estate and life if they agreed to reduce the interest rate; in case of contract violations, the bank may demand early repayment; plus other obligations of the borrower – these should be carefully reviewed and taken into account.

However, your individual conditions must be checked very carefully: passport details, loan amount, term, effective interest rate and nominal interest rate for the use of money, monthly payment size and due date. As paradoxical as it may seem, errors in contracts occur frequently and can lead to unpleasant situations; for example, Rosreestr may suspend registration of the transaction until errors are corrected.

Behind a vast amount of diverse information, two important aspects are often overlooked by borrowers. First: the clause stating that "the rate may be revised in case of changes in market conditions" or "changes in the key interest rate." This means that the lender can alter the terms of the deal without your consent. 

As of today, such clauses are not present in the credit agreements of leading mortgage banks. If you do find such a clause, you must choose: either accept it and keep in mind that in case of the next crisis or increase in the key rate, the bank can change your mortgage rate simply by notifying you, or look for another lender.

Second: today, the size of penalties for late repayment of principal debt and interest must be clearly stated in the agreement. The maximum amount is 0.06% daily of the overdue sum (due to this, even a one-day delay in payment can lead to significant additional financial costs). This regulation was adopted by the State Duma of Russia in June 2016. 

According to Federal Law No. 353-FZ "On Consumer Credit (Loan)", the amount of penalties and fines for mortgage in case of missed payments cannot exceed the key rate at the time of signing the agreement between the bank and the borrower. Previously, the maximum penalty amount was not defined, and the figures given by lenders in contracts led to astronomical sums of penalties accumulating over a short period. 

Currently, after numerous court cases, borrowers' rights are better protected than in the early stages of the mortgage market development. However, if you do not know the conditions of your own credit agreement, their violation will be very unpleasant for both parties. 

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