Novelties in mortgages for 2015

The banks also have to periodically review the values of all pledged properties ​​and monitor the LTV on an existing portfolio.

In practice, this may mean that if there is a significant decrease in the value of the pledged property, the bank may require you to secure another property, or to reduce your loan (making an extra payment) to an amount accepted by the bank. But there is no need to worry. The banks have a lot of loans like these in their portfolio, mainly from 2007 to 2008, when more than 100% financing was provided (not to mention the fact that the value or price of these properties has dropped significantly compared to today) and I have not yet heard of a bank with such course of action and I would not expect it either in the future, especially if the loan is repaid properly, without delay.

The banks should implement this recommendation by the end of 2015 at the latest.

3. To establish and keep to an internal limit on the indicator of the client’s ability to repay the loan

The internal system of the bank should contain a mandatory limit on the internal indicator of the client’s ability to repay the loan. The client’s ability to repay the loan depends on the household income, normal living costs and household expenses resulting from all its financial obligations.

In practice, this may mean that banks will tighten up their conditions and the client will not be able to afford the same amount of mortgage from his or her current salary as today. Example: If today I have a net salary of € 1,000, I am single and 35 years old, the bank deducts my minimum cost of living of about € 250 from my salary (this amount is set internally by the bank and may vary from bank to bank), the payment of a possible consumer loan (e. g. € 100) and from what remains, I can pay 70% (the debt ratio - also an internally set value that may vary from bank to bank), some part of the instalment, for my new loan (about € 500). For this amount I can now afford a mortgage of about € 120,000.

After implementing this recommendation, it may be that the maximum amount of financing for the same client is, for example, up to € 90,000, which will be caused mainly by the increased minimum cost of living and the debt ratio.

An exception is only the so-called unsolicited loans, the amount of which is determined in the pre-approval process without the client’s active participation based on the past data on the client’s financial situation obtained from internal sources. There is no need to verify income for these loans, but the separate monitoring and reporting of these data to the NBS is necessary. However, this exception does not apply to property-secured loans, building loans and interim loans.

An unsolicited loan is a loan offered by the bank without you asking for it. E. g. an authorized overdraft, pre-approved consumer loan, credit card, etc.

The banks should start implementing this recommendation starting from 1 March 2015.

4. To verify the client’s income.

According to this recommendation, the bank should strictly require the confirmation of the client’s income and verify it by means of independent internal or external sources. The bank should not replace the requirement to verify the income by tighter LTV criteria, and it should also state strictly that a declaration of honor is not a sufficient way of demonstrating income. The only exception is with unsolicited loans (see Guideline 3).

In practice, this will mean that no loans will be provided without the confirmation of income (loans of up to 50% of LTV), the same is true for loans provided by submitting a declaration of honor on the income (loans based on company turnover, refinancing loans, loans for members of chambers, etc.). If banks still want to grant such a loan to a client, it will mean a lot of bureaucracy and a lot of documentation that can reliably and sufficiently prove that you have enough income to repay the loan.

The banks should start implementing this recommendation starting from 1 March 2015.

5. To keep to the limit on the indicator of the client’s ability to repay the loan even in the case of an interest rate increase.

Within the meaning of this recommendation, the banks should verify the client’s ability to repay the loan so that they are also able to repay it assuming that the interest rate increases by 2.00%, while respecting the longest recommended period till maturity (within the meaning of Guideline 7). In the case of mortgages for young people with rate rebates, the limit should be tested at the non-bonus rate, increased by 2 percentage points.
If repayments are pre-determined for the entire repayment period and are not set at the same amount, meeting the limit should be tested at the highest instalment.
However, if the contract states the maximum rate of interest increase that is less than 2 percentage points, this value shall be used to test the impact of the rate increase.

The exception is just the loans with the interest rate fixed for the entire maturity of the loan.

With this guideline, the NBS wants to make sure that clients do not get into loan repayment problems due to the increased interest rates in the refixation period. If the fixation anniversary brings an increase to the interest rate, it will of course also mean an increase in the monthly installment, which can cause repayment problems for clients. However, this potential problem may not occur if there is an income increase between the granting of the loan and the refixation. The most endangered group of applicants are those who, when getting the loan, went beyond their financial capabilities and have no income growth potential in their jobs. I will give you an example: today I have a net income of € 800, I am single and 35 years old, the bank can, under present conditions, provide me with a loan amounting to approximately € 100,000 with a monthly payment of approximately € 420. If my monthly payment increases to € 530 (which is an increase by 2.00%) during the refixation, there may be a repayment problem as the installment has risen considerably. The monthly payment of my loan at the time of the provision was about 50% (which was already a critical level at that time), but after the change it is as much as 66%. After the implementation of this recommendation, it will look like this: based on my net income of € 800, the bank will provide me with a loan of only € 80,000 with a monthly payment of about € 340. When my monthly payment increases to € 420 (which is an increase by 2.00%), this will mean an increase in the installment to the critical level of my financial burden, but I will not get much above that level.

The banks should start implementing this recommendation starting from 1 March 2015.

6. To perform stress testing.

The bank should conduct stress testing of the portfolio for an interest rate increase and unemployment increase. The results should be taken into account when adjusting the internal limits on the client’s ability to repay the loan. These tests should cover the following areas:

• an interest rate increase according to the current forward curves, expected on the market over the five-year horizon (at least 3 percentage points),

• simulation of the behavior of individual loans when the client becomes unemployed or their business income decreases significantly

This recommendation may result in an overall increase of the bank risk margins in loans, or the diversification of these margins to certain groups of applicants, depending on the education, the area in which they are employed, the location in which they reside, etc. The increase of risk margins has a direct impact on the amount of the interest rate. In practice, it will mean that the bank will provide you with a lower loan amount and a higher installment.

The banks should implement this recommendation by the end of 2015 at the latest.

7. Not to provide loans with too long a maturity.

This recommendation amends the rules for a maximum loan maturity. The bank should not provide loans whose maturity exceeds the following duration:

• For property-secured loans, interim loans and building loans: 30 years. 
The share of new loans with a maturity of more than 30 years should not exceed 10% on a quarterly basis.

• For other loans: 9 years in the period from 1 March 2015 to 31 December 2015, and 8 years in the period from 1 January 2016

At the same time, the bank should adequately take into account the decrease of the client’s income during retirement age.

The banks should start implementing this recommendation starting from 1 March 2015.

8. Not to provide loans with a shift of the client’s financial burden to later.

The banks should not provide loans with a (partial) deferral of repayment of interest or principal agreed at the time of the provision, gradually increasing instalments, temporary interest rate decrease or less frequent than the monthly repayment frequency.

The following exceptions are possible:

• changes in the interest rate at the time of the refixation, based on the developments on the financial markets,

• reducing the interest rate for mortgages for young people, or its similar temporary reduction for other housing loans if the amount of the repayment is contracted for the entire maturity period,

• reducing mortgage repayments after childbirth,

• cases that do not have a significant financial impact on the client at a later date and do not relate to a period longer than six months from the first drawing of the loan, or more than six repayments or a period of 18 months in the case of the deferred repayment of the principal in financing the construction of residential immovable property. 


This recommendation mainly concerns loans with other than the “standard” annuity (or linear) repayment on a monthly basis. E. g. any type of progressive repayment in which the installment is gradually increased, or loans, for example, with an installment at a quarterly basis, or when you have an agreed temporary interest rate decrease in the first years of repayment (not applicable to loans with public contribution for young people), etc. In short, any loan in which you initially repay less, and then there is a significant increase in the installment, could have a negative impact on your ability to repay the loan.

The banks should start implementing this recommendation starting from 1 March 2015.

9. To maintain a prudent approach to refinancing loans.

This recommendation amends the rules of the provision of refinancing loans where the sum of the remaining principal of refinancing loans increases by more than € 2,000 or 5%. In the case of these loans, the bank should follow these principles:

• adhere to the LTV limits (see Guideline 1), verified based on the actual value of the property in accordance with the internal valuation,

• for each loan, require a confirmation of income and verify that the internal limit on the ability to repay has been met (see Guidelines 3 and 4),

• if the maturity is increased at the same time, for each loan, keep to the limits of the longest maturity (see Guideline 7).

The rules for granting a refinancing loan, as we know them today, will continue to apply, but only for loans where there is almost no increase in the principal (the maximum increase is € 2,000, or 5% of the balance). For loans with higher increases, you will need to document your income (see Guidelines 3 and 4).

Example 1.   I am refinancing a loan with a balance of € 50,000 and I request a loan of € 51,000. In this case, I do not have to document the income.

Example 2.   I am refinancing a loan with a balance of € 50,000 and I request a loan of € 65,000. In this case, I have to document the income.

The banks should start implementing this recommendation starting from 1 March 2015.

10. To maintain a prudent approach to providing loans through intermediaries.

This recommendation encourages banks to observe the following precautionary principles:

• to independently assess and manage the credit risk from the loans through intermediaries.

• to maintain the proportion of intermediated loans at such a level that the bank is not put under pressure to mitigate the loan conditions and sufficiently diversify the intermediaries.

• to individually monitor the intermediated loans and compare their credit risk with other loans.

On the basis of this recommendation, banks should assess the loans through intermediaries separately, while comparing the risk of these loans with the risk of non-intermediated (own) loans. At the same time, they should keep the ratio of intermediated and own loans on such a level that, under the influence of intermediated loans/intermediaries (decrease in newly granted loans), they would not have to loosen the conditions stated in the other recommendations to gain a client/grant a loan.

The banks should implement this recommendation by the end of 2015 at the latest.

________________________________________________________________________

Even though you may consider these changes to be anti-consumer, unpopular, restrictive, etc., keep in mind that they are not intended to be against us, but for our benefit. Each of these recommendations is intended to eliminate the risks of non-repayment of the loan and the overall share of problem loans in the future - the recommendations should simply be a prevention.

If the banks did not make these adjustments, it could have an impact on all of us in the future (including those who will repay on time). Higher interest rates (as banks will have to cover up these losses), the further tightening of loan lending criteria, and many others that may lead to a collapse of Slovak banking in dark scenarios, which would have an impact on each of us.

Peter Duriš

In this article, I am expressing my subjective views and assumptions, based on my experience, knowledge and practice.

The article contains information from the “NBS recommendation in the area of prudential practice on the macrolevel No. 1/2014 of 7 October 2014 on the risks associated with the development on the retail loan market (Overview)”