"In updating the regulations, we have reached an equilibrium — the amendments will reduce the risk of enduring over-indebtedness of residents and will increase their resilience to likely interest rate shocks without negatively affecting total lending volumes though," says Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania. He stresses that the new amendments are particularly relevant currently, when record-low interest rates may create false expectations and urge people to overestimate their possibilities to repay debts.
Under the updated RLR, the maximum amount of a borrower's monthly credit repayment and interest (under all obligations), as to date, will not be above 40% of sustainable monthly income. However, in assessing customers' applications for a housing loan, credit institutions will have to check whether the customer would be financially able to withstand likely leaps in interest rates. For the calculations, the actual interest rate, but not below 5%, will have to be used. At this interest rate, the total amount for covering the obligations will have to not exceed 50% of a customer's monthly income. For example, where the amount of a customer's total liabilities under the current market interest rate will be 35% of his monthly income and the application of the hypothetical interest rate of 5% will increase this ratio to 46%, the issuance of a housing loan will still be possible.
In extending a credit at a fixed interest rate for the entire loan term, only the actual fixed interest rate will have to be applied for calculating a customer's income-to-liabilities ratio, i.e. in assessing a customer, application of an increase in mortgage lending rates will not be compulsory.
The Regulations also provide for an exception, which will give more freedom to credit institutions in the assessment of the possibilities for part of customers to be issued a credit. Where a bank or a credit union will estimate that a customer, seeking a housing loan, will be solvent even when sparing 60% of his monthly income, it will be possible to grant him a housing loan. It will not be possible for such loans to exceed 5% of the amount of new housing loans issued by a credit institution over a year.
In order to prevent the risk of over-indebtedness and based on the good practices of other countries, it has also been established that the maximum maturity of credit will not exceed 30 years, i.e. will be 10 years shorter than the currently applicable one. Analysis of the Bank of Lithuania shows that a longer loan maturity is also related to more frequent delays in loan repayments. In addition, shortening of the loan term entails a sharp decline in the overall amount of interest paid over the entire loan period. In some countries, e.g., Canada, France, Portugal, Finland, Bulgaria, loan maturity is limited to 25 years.
The amendments will only marginally affect the possibilities for residents to borrow a required amount and purchase the desired housing. Retrospective data analysis shows that, if the approved amendments to the regulations had been effective in 2014, considering likely modifications of loan characteristics, 99 in 100 customers would have obtained the entire required amount.
The first RLR were approved by the Board of the Bank of Lithuania in the autumn of 2011. Their aim was to encourage responsible lending practices of credit institutions, market discipline and operational transparency in order to reduce the systemic risk of the credit institutions sector, unbalanced developments in real estate prices and the risk of too strong growth of the credit portfolio. Thereby it is aimed to secure consumers against too heavy a burden of financial liabilities and develop the habits of responsible lending, thus contributing to the ensuring of stability within the entire financial system.
