Bulgaria’s mortgage market has been one of the fastest developing financial markets in this country, especially in the past year.

The amount of mortgage loans granted by Bulgarian banks almost doubled throughout 2005 and the first months of 2006, according to a report published by the Bulgarian National Bank (BNB) at the end of March.

The total amount of mortgage credits at the end of February 2006 rose by 95.1 per cent compared to early 2005 and currently exceeds two billion leva (1.02 billion euro). In Bulgaria, the effective annual interest rate on mortgage loans denominated in the local currency, the lev, dropped to 6.55 per cent at the end of March, BNB data showed.

The annual percentage rate for a 50 000 leva (25 700 euro) 10-year loan, commission fees included, varies between 6.71 and 7.76 per cent from bank to bank.

Most bankers, however, comment that a collapse in interest rates is unlikely, adding that the anticipatory effect of this country’s future European Union accession on the rates has elapsed.

Customer services, though, still have room for improvement and a wider range of products will be marketed, according to bankers.

DZI Bank was the most recent local bank to lower the cost of mortgage borrowing from 9.5 to 7.65 per cent.

Competition among Bulgaria’s mortgage lenders remains intense with Raiffeisen Bank Bulgaria (RBB), Bulbank and First Investment Bank (FIBank) boosting their market presence at the expense of their rivals, the central bank data also shows.

The market is dominated by DSK Bank, United Bulgarian Bank (UBB), Bulbank, HVB Bank Biochim (jointly with Hebros Bank), RBB, Postbank and FIBank.

The top seven banks in this field disbursed a total of 1.6 billion leva in mortgages in 2005, giving them a share of 81.5 per cent, down from 88 per cent in June 2004 and 85 per cent a year later.

Despite a redistribution of market share, the four largest mortgage creditors retained their rankings.

DSK Bank lost nine percentage points of its market-leading share in 18 months, to reach 29.3 per cent at end-2005.

In second place, UBB has a market share of 18.2 per cent, down by one per cent in the fourth quarter of 2005.

Bulbank ranks third with a market share of 11.8 per cent by end-2005, up by 9.6 per cent over the past 18 months, followed by Postbank with 9.5 per cent, up from eight per cent by end-September 2005.

Between June and December 2005, FIBank dropped to fifth place, its market share shrinking from 6.96 to 6.7 per cent.

HVB Biochim and Hebros Bank have a combined share of 4.5 per cent.

Raiffeisen Bank Bulgaria managed to improve its share to 3.94 per cent by end-2005 against 2.18 per cent a year and a half ago.

Allianz Bulgaria, DZI Bank, Piraeos and Economic Investment Bank have a combined market share of about 10 per cent.

The extension of mortgage credits in Bulgaria will soon be somewhat constrained by the new measures introduced on April 1 2006 by the central bank in an attempt to curb lending growth that is threatening the country’s foreign trade balance.

The International Monetary Fund (IMF) urged Bulgaria’s central bank in January to further tighten its restrictions on growth in lending, which the IMF blamed for the country’s rising current account deficit.

Bulgaria’s 2005 current account gap widened to an all-time high of 14.9 per cent of GDP from 8.5 per cent in 2004.

The new set of restrictions, focusing mainly on mortgage lending, are contained in amendments to BNB’s Ordinance 8 on the Capital Adequacy of Banks, which were approved on February 24.

Under the revised ordinance, mortgage loans are classified as assets risk-weighted at 50 per cent when the amount of the loan is no more than 50 per cent of the mortgage.

In cases when the amount of the loan is 100 per cent of the mortgage, the loan is classified as an asset risk-weighted at 100 per cent, which bears the respective implication on the interest rate paid by the borrower.

The new rules are expected to soon prompt banks to require a bigger mortgage co-payment from the borrowers. At present, some Bulgarian banks market loans that cover 100 per cent of the mortgage.

The central bank also amended Ordinance 21 on the minimum obligatory reserves of commercial banks, kept with the BNB, to expand the definition of the term “credit” used in determining the amount of the reserves.

Since April 1, banks are required to book as loan exposures all bonds and other debt securities acquired after December 31 2005.

The new definition excludes bonds and other debt securities issued or underwritten by national governments, central or local banks or entities rated at least Baa3 by Moody’s or BBB- by Standard&Poor’s or Fitch Ratings.

The central bank also recommended that loans to households (consumer and mortgage loans) be granted only if the remaining income is at least 100 leva (around 50 euro) for a household member after interest rate and principal are paid each month.

The central bank has introduced a series of restrictions in the past two years to slow the growth in lending. As a result, credit growth slowed to about 30 per cent in 2005 from 50 per cent in both 2003 and 2004.

BNB has said it plans that the new restrictions will slow credit growth to 17.5 per cent this year.

The IMF has repeatedly warned the country of risks that may arise from the widening of its current account deficit. The Fund and BNB have blamed the rise on the generous lending to consumers that has fuelled imports, increasing the trade deficit and opening a wider gap in the country’s current account balance.

Meanwhile, international investors are carefully monitoring the current account gap in Bulgaria as the country operates under an IMF-advised currency board system that pegs the lev to the euro, bans the central bank from lending to the government, and restricts the central bank’s options for monetary policy influencing.

Despite the measures introduced by the BNB however, few people believe that the growth in mortgage lending for instance will be curbed.

Mortgage loans stood at 27.3 percent of the total liabilities of households at the end of 2005, according to a survey on New Europe released by UniCredit Group, which owns three Bulgarian banks - Bulbank, HVB Bank Biochim and Hebros Bank.

Mortgage is the most dynamically increasing portion of the household debts, with an average annual increase of about 80 percent over the last five years.

Last year was the second in a row in which the financial assets of Bulgarian households increased by 30 per cent, the UniCredit Group report also showed.

The assets amounted to 41 per cent of the gross domestic product (GDP) and in 2006 the figure is expected to reach 45 per cent. In this respect, however, Bulgaria is still well behind European Union countries.

Concurrently, the debts of Bulgarian households have surged, mainly due to a rise in credits, which are transformed into real estate. The strong interest in properties has prompted a 30-per cent price jump.

The per capita financial assets in Bulgaria stood at 1151 euro in 2005, with debts at 492 euro.

The debt to asset ratio was 43 per cent, much higher than the EU average of 27 per cent. Household debts are expected to continue growing. More and more non-banking financial institutions will start providing loans, due to the credit restrictions on banks, UniCredit says.

There is no risk for extreme indebtedness of Bulgarians since the level of borrowed money is low when compared to the average incomes, the report also shows. However, problems might occur for certain individuals because wealth and loans are not distributed equally.