Bank of Lithuania
2021-09-28
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After assessing the housing market situation and the rapidly increasing volume of lending for house purchase, the Bank of Lithuania suggests strengthening the down payment requirement for the second and subsequent housing loans and applying an additional capital buffer of 2% for housing loan portfolio. The new requirements are planned to enter into force on 1 January and 1 July 2022 respectively. 

“We continue to observe a rather high level of housing market activity that leads to an acceleration of housing price growth. A large share of purchases is conducted using own funds, however, the housing loan growth has recently significantly accelerated. The temperature in the market has evidently been rising. The increase in additional housing loans taken by those who already have one or more of such loans, with the aim of renting the purchased housing or earning from a future appreciation, is a cause for concern. Such transactions contribute to the heating up of the market and, as shown by the analysis of the Bank of Lithuania, there is a higher risk that households will face serious financial problems in case of unexpected changes in the economic situation due to a failure to adequately weigh financial obligations. It is important to stress that the proposed preventive measures are targeted, for instance, a larger down-payment for the second and subsequent loans will not affect first-time homebuyers in any way, while a larger capital buffer will contribute to the resilience of banks to housing loan risk,” says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.

Double the down payment for the second and subsequent housing loans

The Bank of Lithuania suggests strengthening the requirements for creditworthiness set out in the Responsible Lending Regulations for borrowers with outstanding housing loans who take additional housing loans. It has been proposed to reduce the loan-to-value (LTV) ratio in such cases to 70% as of 1 January 2022. It would mean that the second or subsequent housing loan would require an own-funds down payment of no less than 30%.

Until recently, such loans have been subject to the LTV ratio of less than 85%, but no specific limit has been set.

It is expected that the tightening of the requirement will prompt a more careful assessment by households of their financial obligations and capacity to repay loans in the event of deterioration of their financial situation.

According to the new proposal, an exemption would be granted only to those borrowers that apply for a second or subsequent loan for house purchase, when the LTV ratio of their former housing loans is already lower than 50%, i.e. the remaining outstanding amount of the loan is lower than a half of the real estate value.

These measures will allow to equalise the riskiness of primary and secondary loans and put additional limits on investment transactions involving loans in the context of rising market overheating risks. However, they will not reduce the ability to acquire the first housing, as in this case the LTV ratio of 85% will continue to be applied.

Additional capital buffer of 2% for housing loan portfolios

The Bank of Lithuania also intends to introduce the sectoral systemic risk buffer (SRB) of 2% to the housing loan portfolios of housing credit issuers (banks and central credit union groups). This capital requirement would supplement the countercyclical capital buffer and would be applied under similar principles as the latter. However, the size of this capital buffer will be calculated using the size of retail positions to natural persons in Lithuania which are secured by residential real estate, and not the whole positions as is the case for the countercyclical capital buffer. It is planned that the SRB will not be applied to those institutions whose housing loan portfolio comprises an insignificant share of the sector’s housing loans, i.e. where it is lower than €50 million.

The sectoral SRB would help increase the financial system’s resilience in the presence of a higher risk of potential housing market overheating, whereas banks and central credit union groups would need to pay closer attention to the risks posed by a rapid growth of housing loans.

A public consultation with market participants on the tightening and the term of application of the Responsible Lending Regulations is currently under way. Notes and proposals of the interested parties are expected by 7 October 2021.

The planned decision on the sectoral SRB will be notified in advance to the European Systemic Risk Board and other institutions in accordance with Section I of Chapter V of the Rules for the Formation of Capital Buffers and to the European Central Bank in accordance with Article 5 of the Single Supervisory Mechanism Framework Regulation.