Stricter mortgage loans? What it means
LTV, indicator of the consumer’s ability to repay, substantial increase in total loan, APR, loan-to-value... It is natural for you to get lost in these terms. The new Decree tightening mortgage terms is full of complicated names and formulations. We will explain what they mean.
* loan-to-value, LTV *
A restriction for loans with LTV over 90% is nothing new. Also last year banks had to limit loans provided to their clients. From 1 January 2017, the limit is stricter and the volume of these housing loans secured by property cannot exceed 10% of the total volume per quarter. In addition, loans with LTV over 80% are monitored. This means that if you are buying a property, you should have available at least 10% or 20% of its value.
If you do not have these funds, you can take out an any purpose consumer loan to raise additional funds, which is usually provided at favorable terms by banks. For example, at Tatra banka you can get a consumer loan simultaneously with a mortgage loan with a favorable interest rate of 5.9% p.a. This, however, entails a higher instalment, since the repayment period of consumer loans is up to 8 years.
* income vs indicator of the consumer’s ability to repay *
If you have changed your job, the change in the minimum employment period is relevant to you. Until now it has been enough to be employed 3, or 4 months. From 1 March 2017 the considered income will be the arithmetic average of the last 6 months. Entrepreneurs will even have to submit additional income documents – in addition to the tax return for the previous year they will also document the current year (for example by interim reports, account statements, etc.).
The Decree also introduces another change concerning income. Banks will immediately deduct from your income the minimum household subsistence and a newly-introduced compulsory reserve calculated as 5% of the difference between income and the minimum subsistence. The reserve will gradually increase and from 1 July 2018 the required reserve will be 20%. The new principle of “indicator of the consumer’s ability to repay” requires that your income after deducting the minimum subsistence and the compulsory reserve not be lower than the total of your expenses and liabilities. Liabilities include, for example, installments on your existing loans and an instalment on a new loan applied for at the bank.
For loans without a fixed interest rate over the entire repayment period, to protect you against possible future increase in interest rates, banks will include these liabilities as the higher of values – your actual instalment or the instalment of your loan with a maximum repayment period and interest rate increase of at least 2%. This means that your available income which you plan to use to repay a new loan may be lower than before.
* property value *
The Decree also specifies how banks are to determine the value of properties and which properties can be used to secure a housing loan. If you pledge the purchased property, its value will be determined as the lowest of: the appraisal, internal bank evaluation and purchase price. So it will not be possible to consider only the appraisal or purchase agreement. The situation is further complicated by various types of properties and the method of their recording in the land register. Do not forget to ask the developer, if your desired new flat will be recorded as a flat, apartment or a house with residential units, etc. Also these facts can influence valuation and your chance to receive the required funds.
Sources and extracts from the measure:
Decree of the National Bank of Slovakia of 13 December 2016 No. 10/2016, stipulating details of considering the consumer's ability to repay a housing loan
What the Decree has introduced:
a) new methodology of calculating the indicator of the consumer’s ability to repay a housing loan,
b) reflecting possible increase in interest rates on housing loans,
c) determining what it means a substantial increase in the total housing loan and a substantial
excess of the total of the outstanding balances of the existing housing loans,
d) requirements for submitting evidence of a consumer's income and for verifying information on a consumer's income,
e) limit on housing loan repayment period,
f) loan-to-value limit,
g) valuation terms of pledged property designed for living
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