MORTGAGES should not go to just anybody who asks for one, the National Bank of Slovakia (NBS) has warned in reaction to a significant increase in the number of loans given out. Growth is not always a good indicator, as the central bank sees a risk that increased competition on the lending market has led to an easing of credit standards – leading to a new set of recommendations to lenders.
“The very strong growth of retail loans, which is currently one of the highest in the European Union, continues,” Vladimír Dvořáček, the executive director of the department for supervision over the financial market at the NBS, said in early October. “The fact that loans are growing is not something we perceive negatively, but it is important that these trends are based on a healthy approach and not only on the growing competition, which may lead to the culmination of some risks in the future.”
Recommendations of the NBS include limiting the ratio between the size of the mortgage and the value of the real estate, and not providing loans with too long a maturation period.
Loans this year have grown at a faster-than-expected rate, said Zdenko Štefanides, senior analyst with VÚB bank, but others note that regulations are keeping pace, including a recent law that limits the maximum interest rates on loans.
“This confirms that the growth rate of the market is healthy and so we are also perceiving it,” Igor Lehoťan, head of retail lending with Slovenská Sporiteľňa, told The Slovak Spectator.
Commercial banks should also start judging whether their clients would be able to repay loans if interest rates rose by 2 percentage points.
“Banks did not verify whether clients will be able to repay their loans, which are provided at the current low interest rates, even if their rise,” Dvořáček said, as cited by the TASR newswire.
Branislav Kachnič, executive manager of Partners Group, also highlighted record low interest rates as a factor to watch.
“Interest rates can once again return to values of the prior five years or so, and it would cause serious problems for households,” Kachnič told The Slovak Spectator.
In addition to being prepared for rising interest rates, the NBS also recommended shortening the periods for repaying mortgages.
“The maximum recommended maturity of housing loans should be 30 years,” said Marek Ličák, the director of NBS macro-prudential policy departmen,. as cited by TASR. The share of loans with a maturity over 30 years to the total number cannot be more than 10 percent.
The NBS also recommends commercial banks reduce the share of mortgages amounting to 90-100 percent of the property value. These should be just one-quarter of new housing loans.
Currently, they account for more than 70 percent and nearly every second mortgage has a loan to value ratio of more than 85 percent. Banks should also perform a stress test on their portfolio, to check how it might respond to increased unemployment or a hike in interest rates.
In addition, financial houses should maintain a prudent approach when lending money through financial brokers. Therefore, these types of mortgages should be first of all rated separately and commercial banks also need to manage credit risk on them individually. Financial houses should also maintain the share of these loans to a level where they will not be exposed to pressure to mitigate credit conditions.
“We will respect these recommendations and try to implement them in the intended time,” Tatra Banka spokeswoman Marína Masárová told The Slovak Spectator.
According to experts, in the next year or two these recommendations will lead to changes in the advertising, product offerings, and, finally, the indicators of banks.
Kachnič outlines that the availability of mortgages or other loans will tighten. Some people will either not get a loan or will be subject to tighter conditions.
“It will protect most clients and banks against injuries which they might cause to themselves, even if a lot of them will not be enthusiastic about the changes,” Kachnič said.
External networks of brokers will also be affected by the increased regulation and restrictions.
anks and experts still expect the number of new mortgages to grow in the coming months.
The increase in loans is also supported by the long-term positive impact of the age structure of the population, as evidenced by a strengthened housing affordability index.
“Increasing competition between banks should also bring further downward pressure on interest rates,” said Tomáš Legerský from FinancnaHitparada.sk, the website comparing financial products.
In comparison with interest rates in the so-called EU 15 countries, which include France, Germany and Italy, there is still a chance for a further drop.
“Personally I think it will bottom out at around 2 percent,” Kachnič said. “It would be naive to expect a negative rate.”
As Legerský explains, bank competition does not only result in lower interest rates, but also in additional benefits for clients such as having a current account without charges, the possibility of attractive accelerated repayment or improved online services.
Disclaimer: The articles included in the “Finances” supplement were created by authors enrolled in the “Focus on business and economy” programme organised by The Slovak Spectator in cooperation with the University of Economics in Bratislava, with the support of the VÚB Foundation. The programme seeks to train journalism students on how to cover business- and economy-related issues. The articles were prepared in line with strict journalistic ethical and reporting standards.
15. Dec 2014 at 0:00 | Edita Etube Muchová