Tightening of Criteria for New Private Real Estate Loans

As of August 1, 2022, banks must implement significantly stricter requirements when issuing new private real estate loans.

From this date, what were previously only recommendations become mandatory: when issuing new private real estate loans, banks must observe significantly stricter criteria. The term, as well as the loan-to-value ratio and the debt ratio of the loans, are affected.

When interest rates were at historically low levels, banks were happy to invest money in real estate loans. The criteria for the issuance of private residential construction loans that banks had to observe previously had only a recommendatory character. Now, however, mandatory requirements apply to new loans in private real estate financing as of August 1, 2022. The reason for this tightening is a requirement from the European Systemic Risk Board, which is based at the ECB. This body had already repeatedly criticized the sometimes lax lending practices of Austrian banks in private real estate lending.

The concern that the real estate market in Austria could continue to overheat and pose a systemic risk in the foreseeable future is also shared by the Austrian National Bank. According to its data, Austrian real estate prices have almost doubled since 2010. Furthermore, according to the National Bank, there is also a massive overvaluation of real estate. This has led to a credit-price spiral. Credit growth in the private sector continued to be dynamic in the third quarter of 2021 as well; therefore, the Financial Market Stability Board has now drawn up specific requirements that are mandatory for banks when issuing new residential construction loans.

• maximum loan-to-value ratio of 90%, with credit institutions being granted an exception quota of 20%
• debt service ratio of a maximum of 40% (exception quota: 10%)
• maximum term of 35 years (exception quota: 5%)
• total possible exceedance of the upper limit at a credit institution of a maximum of 20% of all loans
• Financings up to a de minimis limit of € 50,000 are exempt from these requirements, in order to facilitate in particular the switch from fossil fuels to renewable energy sources

These measures are intended to be limited in duration to three years, that is, until July 31, 2025 – beginning August 1, 2022. With these requirements, the aim is to achieve a relaxation of the real estate market, on the one hand through an artificial reduction in demand, as the approval process for private real estate loans will take longer in the future. And on the other hand, fewer loans will likely be granted in the future, as the banks' room for maneuver has been tightly restricted and potential borrowers will no longer be able to meet the requirements in the same numbers as before.

For further questions and information, please contact me at: Yeliz Lav [email protected] +43 660 748 8817 https://4m-immo.at/

Tightening of new private real estate lending criteria

As of August 1, 2022, banks will be required to apply significantly stricter conditions when granting new private real estate loans.

From this date onwards, what was previously only a recommendation will become mandatory: when granting new private real estate loans, banks must comply with much stricter criteria. This affects the term of the loans and the loan-to-value ratio, as well as the debt service ratio of the loans.

When interest rates were historically low, banks were happy to invest in real estate loans. The criteria that banks had to comply with in order to make private home loans available were until now merely recommendations. However, as of August 1, 2022, mandatory requirements will apply to new loans in private real estate financing. The reason for this tightening is a requirement from the European Systemic Risk Board, which is based at the ECB. The Austrian banks had frequently been criticized for sometimes lax lending practices when granting private real estate loans.

The Austrian National Bank shares the concern that the real estate market in Austria may continue to overheat and pose a systemic risk in the foreseeable future. According to their data, Austrian real estate prices have nearly doubled since 2010. According to the National Bank, there is also significant overvaluation in real estate. This has led to a credit-price spiral. Credit growth in the private sector continued to be dynamic in the third quarter of 2021, which is why the Financial Market Stability Committee has now drawn up mandatory specific guidelines for banks when granting new home loans.

• Maximum loan-to-value ratio of 90%, with an exceptional quota of 20% granted to banks
• Debt service ratio maximum 40% (exception quota: 10%)
• Maximum term of 35 years (exception quota 5%)
• general possible exceeding of the upper limit at one bank for a maximum of 20% of all loans
• Financing of up to at least €50,000 is exempt from these requirements, particularly to facilitate the transition from fossil fuels to renewable energy sources.

These measures will be limited to a three-year period, i.e. until 31 July 2025 – starting from 1 August 2022. On the one hand, these requirements aim to ease the situation on the real estate market with an artificially created shortage of demand, as the approval of private real estate loans will take longer in the future. On the other hand, fewer loans will likely be granted in the future, as banks are given strict limits and potential borrowers can no longer meet their needs as easily as before.

For further questions and information, please feel free to contact me:

Yeliz Lav [email protected] +43 660 748 8817 https://4m-immo.at/