Eesti Pank has set three requirements for issuing housing loans
Three requirements for commercial banks issuing housing loans start to apply from this week. They are a precautionary measure by Eesti Pank to reduce the risks of a lending bubble inflating in the future.
Governor of Eesti Pank Ardo Hansson explained that the move by the central bank will help contain the risk of a housing bubble in the future. “These requirements will not have any noticeable effect on the loan market at the moment as we have introduced them at a level that is close to where the banks are currently lending. The requirements will start to have an effect when competing banks look to take on excessive risks when lending is growing fast".
Mr Hansson noted that the requirements will also protect borrowers by helping them avoid making commitments in an overheated market that they could struggle to meet if the economy later turned downwards.
The first limit is that the amount lent can only be up to 85% of the collateral, which is the housing property being purchased. If the loan is guaranteed by KredEx then it can be for up to 90% of the value of the collateral.
The second limit is that all the monthly loan and lease payments of the borrower taken together may amount to only 50% of the borrower's net income. Net income is regular income that reaches the bank account after taxes have been deducted.
The third limit is that the maximum length of housing loans is 30 years.
The requirements for housing loans have been set close to the current lending standards of the banks, meaning they will not have any significant impact on the conditions currently available in the Estonian housing loan market. The banks are permitted an exemption from the limits for up to 15% of the amount of housing loans issued in a quarter, which will allow them flexibility in making decisions about loans. The exemption is intended for borrowers who have very good ability to repay the loans or very good collateral for example.
Eesti Pank is applying the limits for all the banks operating in Estonia, including branches of foreign banks operating in Estonia. The limits will apply to loans to private people in Estonia for buying, renovating or building housing. The Financial Supervision Authority will supervise how the limits are met.
Eesti Pank got advice on its plan for the requirements for housing loans from the Ministry of Finance, the Financial Supervision Authority and the commercial banks.
Eesti Pank has published background analysis on its website explaining the aims of the requirements and describing them in more detail.
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