Home money The CNB has made mortgages even more exclusive. Fewer people will have them

The CNB has made mortgages even more exclusive. Fewer people will have them

by drbyos

On Thursday, the Czech National Bank decided to define three indicators that can regulate the mortgage market. These are the so-called LTV, DTI and DSTI. The first measures the value of the mortgaged property with the amount of the mortgage. It therefore indicates what part of the purchased property the bank can grant you a mortgage on and how much is to be delivered from its own. The CNB lowers the ceiling for the LTV indicator to 80% (90% for applicants under 36).

The other two indicators compare debt and repayments with the applicant’s income.

The limit for the DTI indicator (applicant’s total indebtedness expressed in multiples of their annual net income) will be 8.5 (9.5 for applicants under 36). The limit of the DSTI indicator (ratio between the total amount of monthly loan repayments of the loan applicant and their monthly net income) will be 45% (50% for applicants under 36).

According to the CNB, the measures take into account the widespread easing of credit conditions by banks and the growing overvaluation of house prices in the Czech Republic, which the central bank estimated in the second quarter of 2021 at nearly 25 % and even in investment housing. more than 30%.

Credit indicators

Needle LTV (Loan to value) represents the percentage ratio between the amount of the loan and the value of the mortgaged property. The CNB recommends that this indicator not exceed for new loans 90 % and from dubna 2022 80 % (90 % for people under 36 who buy their own home).

Needle DTI (Debt to income) i the ratio between the amount of the borrower’s total debt and the amount of his net annual income. The CNB has set this indicator at 8,5 (for young people under 36 on 9,5).

Needle DSTI (Debt Service to Income) is a percentage of the average annual expenses of the loan seeker resulting from their total debt (called debt service) in their annual net income. just said it is percentage of total amount of all monthly payments to net monthly income of the loan applicant. Since April 2022, the CNB has set this indicator at 45 % (50 % for young people under 36).

By setting new rules, the possibility of taking out a mortgage will be closed to one tenth of current potential applicants. The most difficult restriction, according to Česká spořitelna analyst Michal Skořepa, is the disbursement-to-income ratio (DSTI) limit. “Setting it at 45% under current conditions can prevent the emergence of hundreds of roughly higher mortgages, or about 10% of mortgage applications per month,” he said.

While banks as a whole are cautious, in some of them borrower valuation has slowed. The share of subprime loans has grown steadily over the past 12 months.

“The banking industry as a whole has returned to significantly relaxed mortgage lending standards this year. We last observed the relaxed standards in 2018, before limits on income indicators were first introduced. Given this fact and the persistent overvaluation of house prices, we consider it necessary to set more stringent parameters for the granting of mortgages, that is, to set the limits of the LTV indicators , DTI and DSTI at levels similar to those before the start of the pandemic. The aim is to prevent the growing vulnerability of the banking sector, ”said Jiří Rusnok, Governor of the Czech National Bank.

The disintegration can be attributed to competition – when one bank adopts the standard, others gradually follow it. “We did not observe the granting of loans with very high DTI and DSTI values ​​in all the banks. However, there was a danger that the more cautious banks would react to the possible loss of their market share by relaxing standards similar to those of their more aggressive competitors, ”said Jan Frait, director of the Financial Stability section of the Bank. CNB.

“Where the limit values ​​set today are more stringent than the current practice in individual banks, there will of course be some reduction in the availability of mortgages,” Skořepa explains.

“Demand is now severely depleted by the hectic mortgage rates of the previous months in an attempt to secure even low interest rates, so I don’t expect a big impact. Limits could become a bigger drag again next year, when brand new candidates start entering the market, ”he added.

“The impact of regulation will affect most applicants. The only ones who will not be affected will be the clients who have high incomes and sufficient own resources in relation to the required amount of the loan ”, thinks David Eim of the consulting firm Gepard Finance.

“And if we look at real estate prices in big cities, most customers just won’t have more income and enough own resources. They will therefore have to find a solution and compromises will have to be made, ”he added.

The legal recommendation is required instead

Until now, the CNB managed the indicators “only” in the form of recommendations. These banks may or may not have complied. The only punishment for them was the threat of increasing capital adequacy, i.e. capital. While the new CNB sets the rules by its decision and they are imperative.

In this case, there is a fine of up to ten million for the systematic violation of the law and a request for a change of management. What bankers won’t want to afford due to additional career opportunities.

In this regard, the law also allows the CNB to regulate non-bank credit providers.

The CNB recently set specific levels of credit ceilings by issuing general measures with effect from April 1, 2022. The CNB will continue to adapt certain conditions related to the granting of mortgage loans which are not regulated by law. CNB, such as maximum maturity, by simple recommendations or by testing the ability of loan seekers to withstand a 2 percentage point increase in interest rates.

The new legislation allows 5% of all newly issued mortgages to fail to meet the recommended limits of the DTI and DSTI indicators if the mortgage provider is confident that the applicant will repay the loan in the future without any problems.

Credit indicators will also be more favorable to young mortgage applicants under the age of 36. These applicants will have a higher credit indicator limit of 10 percentage points for the LTV, five percentage points for the DSTI indicator (the amount of monthly income down payments) and a multiple of one-year net income for the DTI (total debt-to-income) indicator.

If the spouses or registered partners apply together, it will be enough that only one reaches the age limit of 36 years, necessary for the application of the lower limits of the credit indicators. The limits for applicants under 36 only apply to loans used to purchase their own home.

The problem, however, is that there are more than half of those applicants in the new mortgage package. The exception actually applies to most.

When the CNB sets the indicators today, they won’t come into effect until April. In law, banks provide for a preparation period of four months. In this way, some sellers can be expected to use the interim in the meantime to attract the “last resort with a favorable mortgage” – if mortgages at current rates can be considered advantageous.

“A certain advertising campaign cannot be ruled out, however, banks will have to be careful not to grant mortgage loans in the meantime, which will not yet have to comply with the new limits. new limits announced by law, ”notes Spořitelna analyst Michal Skořepa.

CNB’s board of directors also decided to increase the banks’ countercyclical capital buffer rate by 0.5 percentage point to 2% with effect from January 1, 2023.

Mandatory institutions must build up a reserve based on the BNC’s instructions in times of excessive credit growth. This usually increases financial imbalances and leads to increased systemic risk.

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