The Central Bank, for financial stability, has decided that, from 2022, there will be changes to which all banks must adapt, about the conditions for the provision of mortgage loans.
The new legislation stipulates that 5% of new loans disbursed must not comply with the recommended DTI and DSTI limits if the mortgage creditor is convinced that the applicant will repay the loan without problems in the future. In 2021, the Czech Parliament adopted an amendment to the CNB Act allowing the CNB to set binding maximum limits on these credit ratios for all mortgage credit institutions. The CNB makes use of this authorization for the first time. The specific levels of the ceilings on credit ratios will be fixed by a general measure from 1 April 2022.
The CNB reintroduces limits for DTI and DSTI on mortgage loans
The Board of Directors of CNB Bank has decided to set limits to credit relationships for the provision of mortgage loans.
From 1 April 2022, mortgage banks will again be required to comply with the DTI (debt-to-income) and DSTI (debt service to income) limits.
- The debt/income ratio (DTI) is the percentage of your gross monthly income that goes to pay monthly debt payments and is used by lenders to determine the loan risk. As a result, banks and financial credit providers want to see low DTI ratios before issuing loans to a potential borrower. The limit to the ITD ratio (debt/income) will be 8.5 ( 9.5 for applicants under 36 years );
- DSTI is a measure of the amount of debt service payments about total disposable income, that is, the ratio of the sum of a claimant’s monthly repayments to their net monthly income. It is often used to assess the ability of households to repay debt. The limit of the DSTI ratio (debt service/income) will be 45% ( 50% for applicants under 36 years ).
Limits for applicants under 36 years apply only to loans for house purchase property. All limits were set following the amended CNB Act, which since August 2021 has authorized the central bank to set binding limits on the three ratios.
- In addition, the CNB is lowering the maximum limit of the ratio between the value of a mortgage loan and the value of the guarantee, LTV (loan-to-value) 80%, that is, banks will not be able to grant loans with LTV with an amount of the loan exceeding 80% of the value of the property pledged (90% for applicants under 36 years).
- The Board of Directors of Banca CNB also decided to increase the rate of the countercyclical capital reserve (Ccyb) by 0.5 percentage points to 2% with effect from 1 January 2023. This instrument aims to increase the resilience of the banking sector to the risks associated with fluctuations in lending activity. The Ccyb should allow banks to lend to households and businesses even at a time of recession or financial instability.
These measures take into account the general relaxation of credit standards by banks and the increasing overvaluation of apartment prices in the Czech Republic.
However, lenders may apply an exemption not exceeding 5% of the total volume of mortgage loans granted in the previous quarter to specific cases in the current solar quarter. The Czech financial sector maintained a high resilience to adverse shocks in 2021.
Following an assessment of financial cycle indicators, banking sector vulnerability, and other factors affecting resilience, The Board of Directors of CNB Bank has decided to reintroduce limits in excess of the DTI and DSTI ratios for mortgage loans. These limits were applied until spring 2020 before the economy was hit by the coronavirus crisis. The bank’s board of directors also modified the LTV limit.
