The new lending regulations are intended to reduce the risk of defaults. Open banking is also expected to play a more central role in the future.
Current real estate prices, combined with low interest rates, have in recent years led to real estate loans being granted to borrowers with very little equity. As a result, these borrowers must devote a large portion of their income to repaying their loans. The resulting risks can not only impose a significant financial burden on borrowers but also negatively affect the stability of the Austrian financial market. On the recommendation of the Financial Market Stability Board (FMSG), and based on an expert opinion by the Oesterreichische Nationalbank (OeNB), lending regulations are therefore set to be tightened in July 2022 through the Regulation on Real Estate Financing Measures in Credit Institutions (KIM-V).
Stricter Criteria for Granting Loans
According to the Financial Market Authority (FMA), greater attention will be paid in future to borrowers’ ability to repay their loans, in order to limit risks to the Austrian financial market. In particular, the following criteria must be met (apart from limited exceptions allowed for each bank):
- A maximum loan-to-value ratio of 90%, meaning that the loan amount may not exceed 90% of the market value of the property and any additional collateral.
- A maximum debt service-to-income ratio (DSTI) of 40%, meaning that monthly interest and principal payments may not exceed 40% of monthly income.
- A maximum loan term of 35 years.
This is intended to ensure that, in the event of a payment default, sufficient assets are available to cover outstanding liabilities, while borrowers maintain adequate liquidity to meet their ongoing payment obligations.
A Loan Without Equity? Many Borrowers Face Challenges
Particularly due to the recent sharp rise in real estate prices, many borrowers currently do not meet one or more of these requirements. Beyond reducing risks to the Austrian financial system, financing that matches a borrower’s economic circumstances is in the interest of both lenders and borrowers. A real estate loan in particular is a commitment that typically extends over many years. The new minimum criteria help ensure that borrowers can comfortably afford their loan payments even when conditions change, for example when interest rates rise or their personal financial circumstances shift.
The Dream Home Often Remains Just a Dream
With the goal of establishing more sustainable lending standards, the stricter guidelines will inevitably make it more difficult for borrowers to obtain financing for their desired property. In credit intermediation, it is therefore particularly important to assess a borrower’s financial capacity as quickly and easily as possible. The debt service-to-income ratio plays a key role here, as it provides a reliable indication of a person’s ability to meet their regular payment obligations. A high DSTI can indicate an increased risk of over-indebtedness. In this respect, the current low-interest-rate environment benefits borrowers, as it has a positive impact on their DSTI.
Creditworthiness Assessments for Real Estate Financing Are Becoming Increasingly Digital
The tightening of lending standards is accompanied by a steadily rising number of loan applicants. At the same time, digital application processes have become increasingly common in recent years. This presents a challenge for lenders, who need to collect relevant metrics quickly, automatically and with a high degree of accuracy, as early as possible in the process. Open banking in particular makes it possible to determine the DSTI quickly and easily. With the borrower’s voluntary consent, the information needed to calculate the DSTI can be securely retrieved and analysed directly during the application process. The legal framework for this is the Payment Services Directive II (PSD2), which has applied across the EU since 2018.
Would you like to learn more about PSD2? Read here.
FINcredible Check: Household Budget Analysis and DSTI in One Step
FINcredible GmbH, which is majority-owned by KSV1870, offers a financial assessment tool called FINcredible Check. It includes a complete digital household budget analysis as well as a calculation of the debt service-to-income ratio. This gives both borrowers and lenders a well-founded overview of liquidity and an objective basis for decisions on sustainable lending.
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