Households not only must contend with inflation, they now have a strong dollar to contend with and interest rate hikes from lenders

Property ownership is supposed to put people in control of their lives. A society’s promise isn’t fulfilled, or so the argument goes, until that nation swells with property owners who increase the value of their holdings through upkeep, maintenance and further investments.

For many Ukrainian first-time apartment owners, the transition is especially sweet after years of living in cramped state-owned apartments. The same is true for car ownership.

However, a credit crunch is abruptly dashing dreams of home ownership – or at least of affordable, fixed-interest loans needed to buy those homes. That’s what Ukrainians are learning the hard way.

Under pressure due to heavy borrowing in recent years from abroad and risky lending within Ukraine, the country’s banks are pressed for cash. They need hard currency to pay off tens of billions of dollars in foreign debt next year.

“Banks are seeing their profit margins slimming. They need to somehow counterbalance this, so they’re hiking loan rates for existing borrowers,” said an official with International Mortgage Bank.

That’s what cash-strapped clients have discovered to their chagrin.

The country’s banks have been busy sending letters to clients, asking them to accept higher interest rates on their home and car mortgages. Many banks are asking for annual rates to be increased from 12 percent to 13 percent. Others are unilaterally hiking rates much higher.

If it is not illegal, it certainly puts more borrowers in danger of default as the nation’s citizens get squeezed by higher inflation and a declining hryvnia.

“Surely a snowball effect can take place when non-payable loans imply growing rates, which, in turn, result in further defaults,” said Vladislav Perevozchikov, head of research for Phoenix Capital, a Kyiv-based investment bank.

Standard and Poor’s estimated the share of non-performance loans to stand at 35 percent of all existing loans, while Phoenix Capital estimated 15-20 percent of mortgage loans to be “problematic,” but believes the majority of these mortgages will be “restructured and eventually paid.”

If true, the easy-credit party that started in 2000 may be over as seven years of economic growth come to an end. During this time, consumers borrowed not only for houses, but also washing machines, refrigerators, microwave ovens, new cars and apartments.

Banks in recent years borrowed heavily abroad from Western lenders. They re-lent the money to meet the growing appetites of citizens. Now with the credit crunch hitting Ukraine in full force, banks are passing their rising costs to existing borrowers.

“I received a phone call from Rodovid Bank, informing me that my car loan interest rate will rise from 12 to 16 percent,” said a disgruntled borrower who took out the loan in dollars when the hryvnia traded at less that 5 to the dollar.

A Rodovid branch manager confirmed that the bank in October increased rates on existing car loans 1 to 4 percent and stopped issuing mortgage and car loans altogether. Rodovid bank is not alone, making for more disgruntled customers across the nation.

This customer said she had no options, since her loan payments are automatically withdrawn from the bank account to which her salary is wired monthly. She has yet to receive official notification in writing, which, according to law, should have happened within seven days of the interest rate hike.

A mortgage borrower with Ukrsotsbank received a letter, which, in fact, was an amendment to the existing loan agreement, asking her to agree in writing to a 1 percent increase. “She refused to sign it, yet the bank informed her that the interest hike will go into effect this month,” her husband said.

A $100,000 loan with an annual 10 percent interest rate will require an additional payment of $83 per month.

Some clients are seeking to challenge the interest rate hikes with the help of lawyers, who are eager to get paid for the fight and promise victory at a cost. Other legal experts say the options are limited.

“As a general principle, this is entirely legal when considering legislation on lending. The bank is generally entitled to increase the interest rate,” said Viktoriya Podvorchanska, a finance lawyer at Magisters law firm in Kyiv. However, she notes that NBU rules regulating the practical side of such increases allow for various interpretations.

“According to NBU regulations, such increases should be well-grounded and are permitted if the cost of credit resources for a bank rises” she added.

The consumer rights law, adopted in Dec. 2005, is widely viewed as the main regulation of loan terms, even trumping executive government institutions such as the National Bank of Ukraine.

According to the law, consumer loan interest rates can be increased if the central bank’s discount rate rises, which it did from 10 to 12 percent, in April 2008. But it hasn’t risen since.

However, two NBU resolutions, one in May 2007 and the other in Oct. 2008, stipulated, among other things, that banks can amend loan agreements and interest rates if such changes correspond to changes in the discount rate of the NBU. They can do so also if other circumstances occur, affecting the value of credit availability for banks.

“Such a clarification may be interpreted as allowing banks to increase rates,” said Podvorchanska of Magisters law firm.

Although mortgage loan agreements are similar in form, many have unlawful clauses. For example, a borrower with Unicredit Bank re-read her agreement. She learned that filing a lawsuit against the bank could nullify the loan and allow the bank to demand full repayment.

“Such a clause isn’t lawful and a complaint could be filed in court since there exists a concept of ‘adequacy rules” when drafting agreements,” said Serhiy Boyarchukov, a managing partner with Aliekseyev, Boyarchukov and Partners. “The borrower could factually sign the agreement and later file a complaint against the inadequate clause in court.”

Lawyers believe borrowers can win in court, or at least reduce the size of the interest rate hike.

“A competent court may … stick to the provisions of the consumer rights law and applicable NBU regulations,” Podvorchanska of Magisters law firm said.

Borrowers do have a chance in court, said Boyarchukov of Aliekseyev, Boyarchukov and Partners: “All it takes is someone to win a court case and this will set a precedent.” Podvorchansk said that if a considerable number of cases are resolved in “favor of borrowers, then the situation might change as it will become increasingly easier to prove a lack of grounds for the interest rate increase.”