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Lithuania scrambles to tighten mortgage rules

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RULinas Jegelevičius for the BNN

Are you zeroing in on an apartment or house of your dreams in Lithuania? You’d better hurry up with the mortgage loan! Аs the Central Bank of Lithuania (CBL) readies to hammer out a set of stringent mortgage rules, many future homeowners are about to face some major roadblocks along the way to the coveted property.

Among the proposed amendments to the so-called Responsible Lending Provisions (RLP) are shorter mortgage repayment terms- from 40 down to 25 years (!)- tougher foreign currency mortgage conditions and no possibility for mortgage refinancing.

Central Bank drawing up new rules

The Central Bank is going to draw up the RLP amendments over a couple of weeks before they, along with the EU Mortgage Directive, are transposed into the Lithuanian legislation, expectedly before March, 2016.

But with news out not only scores of potential mortgage-takers are bristling against the initiative, but the Lithuanian Bank Association (LBA), too, warning that frequent changes to the legislation, especially toughening the borrowing, might have an ill-effect on all economics.

Simonas Krėpšta, the director of Financial Stability Department at the Central Bank of Lithuania (CBL), insisted to Delfi, a Lithuanian news site, that the RLP changes are about the Bank’s good will                                           to protect people from a possible mortgage interest rate shock in the future.

«Currently, extremely low interest rates prevail in the marketplace, but they can bounce back to the usual level in the future. Low interest rates do not motivate households to appropriately assess the expenditures for the mortgage, which can lead to overrating one’s mortgage loan return possibilities. Thence, the necessity to prevent households from assuming excessive financial commitments and have them protected against the risks stemming from the possible interest rate growth,» the CBL officer told.

The bank department director believes the existing provision on the maximum mortgage repayment time –at 40 year now in Lithuania- is just too high compared in that regard to other countries around.

It allows assuming too big financial commitments, often too heavy for the mortgage payer, taking into account the income.

The Bank mulls shortening the maximum term for mortgage loan return from 40 to 25 years.

«Following the international practice, also considering adverse impact of duration of a long-term loan to a household’s financial stability the maximum mortgage repayment term will be shortened,» the banker said

Borrow amount earned over last six years

Among the proposals, the «factual» interest rate, which is no smaller than that set by the Central Bank, will have to be used by banks to assess a household’s ability to pay back the loan. Until now, the «present» interest rate, hovering in historic record-lows, is used for the assessment.

The CBL intends to set the interest rate norm heeding the statistics of long-term mortgage interest rate norms.

The Bank also wants potential mortgage-takers to borrow amount that is no larger than income from the last six years is.

Now, Lithuanian citizens can go deep into debt equal to the proceeds from the last eleven years.

For example, with the average wage in Lithuania in the last quarter of 2014 being at 553.9 euro after deductions, one with the wage could borrow 73,115 euro for buying a property.

The CBL seeks to reduce the maximum mortgage debt up to 39,881 euro.

But those with considerably better income could expect exceptions from the rule.

The Central Bank also mulls toughening borrowing conditions for foreign currency mortgages and wants to embed in the new legislation prohibition to link loans with other financial products.

Recently, with the Swiss franc soaring, so did the mortgages for scores of distressed Lithuanians, but the measures the CBL intends to adopt are said to prevent that from happening ever again.

New rules will strain economy

With the news on the proposals stirring a buzz in the country, others bankers doubt whether this is the right time to tighten mortgage conditions.

«The Responsible Lending Provisions in their current shape do the job- set limits on mortgages. In fact, the RLP is a lot more effective than the Mortgage Loan Directive…It seems to us there is no bubble –people tend to borrow inconsiderable amounts and tend to buy modest housing. The new owners are presented (by bank representatives-L.J) calculations what happened to the mortgages if the interest rates increased maximally. I do not know whether now is the right time to do it, when in Europe there are many other various ways aimed to boosting the economy. Such a decision will have impact on people’s possibilities to acquire their own property and, thence, will strain the economy,» said Stasys Kropas, the president of the Lithuanian Bank Association.

With the mortgage repayment term likely to be curtailed, the amount of monthly mortgage payments will soar, with all the new home owners up to their neck in the financial burden.

«The economy will little benefit from thousands of young, hard-working people, only banks (will benefit)», caution other bankers.

According to Swedbank, the average mortgage in the country at the end of the last year was around 44,600 euro, with Vilnius residents’ average housing loan being the biggest: around 60,000 euro. In Klaipeda, the Lithuanian seaport, the average loan hovered around 47,000 euro in 2014 and in Kaunas, the second-largest Lithuanian city, it was approximately 42,000 euro.

No downpayment available? No worries!

But with the Central Bank of Lithuania readying for the new mortgage condition rules, «Hanner», one of the country’s largest real estate developers, is tempting buyers who simply do not have for desired property enough money for the downpayment.

Usually, the initial payment for developer comprises around 15-20 percent of the property’s price.

Company says this is not a marketing trick, but a real thing the developer wants to pursue.

« We have so many interested in the possibility that we are not able to answer all calls. By this we want to target potential real estate buyers who cannot afford to participate in the market because of the downpayment requirement. Most of the time the people have jobs and get good salaries, but in order to save the money they have to spend from 5 to 10 years. We want to allow them choose a desired apartment and lease it until they accrue the necessary initial funds,» explained Arvydas Avulis, the chairman of the Board of the company.

The builder has over 400 unsold apartments as of now.

The businessman denied that «Hanner» seeks to bypass the Responsible Lending Provisions by that.

«We are not intending to it at all. All what we wants is let the person willing to buy a property save the necessary money for downpayment while leasing the apartment,» he said.

Krėpšta, of the CBL, was cautious about the developer’s initiative, saying the lending bank, Swedbank, has still to follow all the regulations.

«Embedded requirement of 85 percent as the maximum proportion between the property price and mortgage loan protects home-buyers from possible fluctuations of price,» he insisted, adding, «the key objective of the measures is to limit too rapid and imbalanced property credit growth and form responsible borrowing practice. Lithuania and other countries’ painful practice reinforces the notion that too rapid growth of lending ends up in a recession of real estate market and economy.»

Exasperated mortgage owner

«I personally know five people at least who pay mortgages, but now, with some of the banking provisions tightened, they cannot refinance their loans. They are denied to borrow cheaper because, upon the new conditions, they must prove that their current income is bigger than that when obtaining the mortgage loan. Earlier, a four-member family would easily get a credit with monthly income in average of 6,000 litas (1740 euro), but now, with the income slightly lower, their request for a mortgage will likely be turned down. This also applies to mortgage refinancing, too. No matter that I make monthly mortgage and mortgage interest payments in time, but the Central Bank just won’t you let me get the mortgage refinanced for a better one, with a lesser interest rate. This is utter crap,» Dovydas Bajoras, a businessman in Klaipeda, told BNN.

SauliusVargonis, a senior chief at Ober-Haus, one of the largest Lithuanian real estate companies, told BNN be believes that the three largest Lithuanian cities’ mortgage takers will be affected most by the stringent new Responsible Lending Provisions if they are enacted.

« They will not especially strain, I reckon, economy property buyers, but will affect those willing to buy higher-segment or luxurious property. We do not now at the point how many people can be ill-effected, but obviously, there will be some ripples swirling around from this,» the expert told.

Ref: 020/111.111.111.1391


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