Initial deposit may increase when buying Property

NT market offers to cool down twice as much as start-ups for second home buyers

On 28 September 2021, at 10:36 a.m., The Bank of Lithuania proposes to tighten the initial contribution requirement not for the first home loans, but for credit providers to apply an additional capital buffer of 2% to the housing loan portfolio, announced Gediminas Šimkus, Chairman of the Board of the Central Bank, on Tuesday.

NT market offers to cool down twice as much as start-ups for second home buyers

© DELFI / Josvydas Elinskas

It is planned that the new requirements could enter into force on 1 January and 1 July 2022 respectively.

G. Šimkus taught at the press conference that measures to prevent the heating of the RE market were taken after assessing the situation in the housing market and the rapidly growing volume of lending for house purchase.

"We see that some macroprudential policy measures are needed," he said.

The Bank of Lithuania proposes to strengthen the creditworthiness requirements provided for in the Responsible Lending Regulations for those who take out home loans already having other outstanding home loans – from 1 January next year it is proposed to reduce the ratio of the maximum amount of credit allowed to the value of mortgaged real estate (LTV) to 70 per cent.

The Bank of Lithuania also intends to introduce a sectoral systemic risk buffer (SRR) of 2% to housing credit providers (banks and groups of central credit unions). Systemic Risk Buffer) rate for the home loan portfolio. This capital requirement would be supplemented and applied on a similar principle as the countercyclical capital buffer (ACP) rate, but the capital buffer would be calculated not from the size of all exposures, but from the size of the exposures to natural persons in Lithuania that are related to real estate collateral. It is envisaged that the reserve requirement would not apply to institutions with a very small portfolio of home loans in the sector, i.e. less than EUR 50 million. Euro.

Gediminas Šimkus

Gediminas Šimkus
© Bank of Lithuania

The scale has increased

According to an article by Young Karmelavičius, Mantas Dirma and Giedrius Stalenis, specialists of the Systemic Risk Modelling Division of the Bank of Lithuania, the number of second home loans increased during the COVID-19 pandemic.

"The second home loans amounted to EUR 166 million between January and August 2021. 12% of the flow of new home loans granted and about 10-11% at the end of 2019 and 2020.

During the pandemic, the share of second home loans increased almost throughout Lithuania, and the biggest jump – from 9 to 16 per cent – is in Klaipėda County. This trend can be attributed to the purchase of investment housing or housing for recreation, for example in resorts," the authors write.

According to specialists, historical data show that second home loans tend to be riskier than the first, even taking into account the different characteristics of the borrower and the loan.

"Micro-level credit risk-based models show that, in view of the development of an adverse economic scenario, households with other recently taken out and low amortised home loans would need a slightly higher initial deposit of at least 16-24 % of the value of the collateral assets when taking out the second home loan. A requirement of this size would ensure that the total credit risk of a household with two home loans would not exceed the credit risk of the same household if it had a single home loan. However, in the case of additional macro-level risks to financial stability, where housing investment with a second loan contributes to the development of imbalances in the housing market, it may also be appropriate to make a stricter initial contribution level requirement for second loans," their publication reads.

Three more measures

G. Šimkus reminded at a press conference that the Bank of Lithuania had submitted proposals for registered preliminary housing acquisition contracts to the Working Party on The Reduction of the Shadow Economy.

"This is an important tool to gather more information when the initial sale of housing takes place. This would allow better measures to be built, to contribute to transparency, to avoid the possibility of tax avoidance," he said.

Another named measure is to limit the ability to pay for RE in cash.

"It is worth resuming this debate. The RE tax is also under consideration. It is a source of revenue for budgets, but it may also have wider implications. This is a stabilising role for the RE market. We want to emphasize this role – that when the state builds and discusses this tax, it will focus not only on budgets, but also on the possible functioning of the RE market," said G. Šimkus.

The Head of the Bank of Lithuania noticed that only 40% of housing acquisitions take place with loans, which is 60% of the value.

"Those who borrow more to buy a home are in cities where loans are needed. Roughly speaking to half of the buyers, this will not work at all. It is a tool for the riskiest part, those who take out loans for investment purposes," said G. Šimkus.

G. Šimkus said that the measures presented are supported by market participants.

„Galime kalbėti apie dizainą, tačiau rinkoje supratimas yra. Tai, kad mes dabar išeiname ir pradedame kalbėti apie tai, visiškai nereiškia, kad patys rinkos dalyviai… Mano galva, iš jų pusės būtų ir neteisinga, nesolidaru, jei jie užsimerktų ir pradėtų specialiai taikyti švelnesnius reikalavimus tam, kad paspartintų.

Now comes to the credit institution, asking for a loan, and that credit institution, knowing that the requirements will be tightened, specifically forsesize lending in order to lend. That would be an example of non-cooperation.

However, this is about 12% of the loan flow, which is a small part. In addition, it is not aimed at undercutting RE prices, the ability to borrow, but rather at helping to prevent risks in those lending segments where the risk is higher," said the Head of the Bank of Lithuania.

G. Šimkus noted that the Lithuanian RE market is currently "at the beginning of heating, heating". "This is the same time that institutions have to start acting, responding to risks," he said.

Source: NT rinką siūlo vėsinti dvigubai didesniu pradiniu įnašu perkantiems antrą būstą – DELFI Verslas

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