Estonia, Financial Services, Legislation, Loan, Real Estate

The first limit is on LTV (loan-to-value), and states that the loan amount can only be up to 85% of the value of the collateral. If the loan is guaranteed by KredEx then the loan amount can be for up to 90% of the value of the collateral.

The second limit is on DSTI (debt service-to-income), and states that all the monthly loan and lease principal and interest payments of the borrower taken together may amount to only 50% of the borrower’s monthly net income. Net income is regular income that reaches the bank account after taxes have been deducted.

The third limit is that the maximum maturity of housing loans is to be 30 years.

Governor of Eesti Pank Ardo Hansson explained that the requirements for housing loans are a precautionary step by the central bank to contain the risk of a housing bubble in the future. “This reflects the lessons of the last lending boom, when tools like this could have slowed the rate of loan growth and softened the crisis that followed the boom.”

The requirements for housing loans will protect the Estonian financial system against the danger that competing banks may take on excessive risks when lending is growing fast, said Hansson. “The experience from the lending boom is that limits on housing loans protect borrowers too, because they deter transactions in an overheated market that could cause problems for repayments if there is a downturn later.”

The internal rules of the commercial banks for issuing housing loans are mainly within the limits planned by the central bank, and the majority of loans are issued with remarkably conservative conditions, so the limits planned by Eesti Pank will not make the conditions for issuing housing loans tighter than they currently are.

Eesti Pank is planning to introduce the requirements for all the banks operating in Estonia, including branches of foreign banks in Estonia. The limits will apply to loans to households for buying, renovating or building housing in Estonia. The Estonian Financial Supervision Authority will supervise how the limits are met.

It is planned that the commercial banks will be permitted an exemption from the limits for up to 15% of the amount of housing loans issued in a month. The exemption is intended for borrowers who have very good ability to repay the loans or very good collateral for example.

Eesti Pank is planning to impose the limits on issuing housing loans from the start of 2015. The central bank will consult the commercial banks on how the technical details for how the limits will be calculated in November this year.