Eesti Pank Press Release 16.12.2014
As of March 2015, Eesti Pank will be applying three requirements to commercial banks issuing housing loans as a precautionary step to decrease the risk of a credit boom in the future.
The central bank initially planned to apply the housing loan requirements from the start of next year, but given the feedback from commercial banks on the requirements, the central bank decided to postpone enforcing the requirements by two months to give the banks time to adjust and review their internal lending procedures, if necessary.
The first requirement for the issue of housing loans is that the loan amount can be up to 85% of the value of the underlying property. If the surety is provided by Kredex, then the loan can be up to 90% of the value of the collateral.
The second requirement is that all the loan and lease payments of the potential borrower combined cannot exceed 50% of his or her net income. Net income is regular income paid to the person's bank account after all taxes.
The third requirement states that a housing loan has to be paid back in 30 years.
Governor of Eesti Pank Ardo Hansson says that this precautionary step by the central bank will help to avoid the risk of a credit boom in the future. "The requirements for housing loans will protect the Estonian financial system from risks in a situation where competing banks would like to take too many risks in times of fast credit growth. The requirements will also protect the borrower, as in an overheating market they prevent transactions that – in a recession – would mean difficulties in paying back the loan."
The new housing loan requirements will be applied at a level close to the banks' current lending standards. Thus, these requirements will not have a major impact on the conditions currently in place on the Estonian housing loan market. In addition, banks will be permitted to make exceptions to the requirements. These exceptions can cover up to 15% of the volume of housing loans issued in a quarter, which gives the banks sufficient flexibility in their lending decisions. The exceptions are meant to be used in cases where the borrower has excellent solvency or excellent collateral.
The requirements set by Eesti Pank will be applied to all banks operating in Estonia, including the branches of foreign banks. Loans issued to private persons for purchasing, renovating or building a home will be affected by the requirements. The Financial Supervision Authority will be monitoring compliance with the requirements.
Eesti Pank sought advice on the housing loan requirements from the Ministry of Finance, the Financial Supervision Authority and commercial banks. After receiving feedback the central bank changed the wording of the draft regulation, and as a technical change, extended the period for considering exceptions. The initial plan was to allow exceptions to be considered by the month, but this period has now been extended to a quarter.
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Eesti Pank is setting requirements for housing loans from March 2015 (2)