Mortgage Loans: The new limits from 2025 – What applies to buying a first or second home 2024-03-24 11:54:55

The first is capping the debt service-to-income ratio at 50% for first-time homebuyers and 40% for all other borrowers. The second is the maximum allowable loan-to-value ratio of 90% for first-time buyers and 80% for everyone else. Essentially, it limits something that the systemic banks have been following anyway, so their current lending policy will not be affected.

Crash test

Final 2022 figures show that in the fourth quarter the loan-to-value ratio at loan origination was at 61.6%, well below the 80-90% threshold. Also, in terms of loan servicing costs, it was at 24.2% of the borrower’s annual income, well below the 40-50% of the new limits. Given that the systemic banks, under the strict supervision of the ECB and after the adventure of the Memoranda era, already follow a strict lending policy, the new limits do not seem to bring reversals.

The… fine print

The debt service-to-income at origination ratio refers to the annual cost of servicing the total debt in relation to the total annual disposable income of the borrower. This means that for an employee with an average salary of 1,250 euros, for 14 months of the year, after insurance contributions, taxes, etc., the real disposable income is 13,774 euros or 984 euros per month.

The monthly charge of a loan that will be granted from the New Year of 2025 cannot be more than 492 euros. This means 5,904 euros per year. The vast majority of home equity loans have repayment terms of 20 to 30 years. This means that for someone with an average income, the loan granting limit is between 118,080 and 177,120 euros.

In the context of the limit for granting an amount up to 80-90% of the value of the property, this means that the buyer of the example could theoretically and with the minimum equity participation of 10-20% buy a residence worth up to 221,400 euros if it is not his first purchase or up to 196,800 euros if it is his first home purchase.

Risks

It is recalled that the IMF has also emphasized in its reports that there are risks for the economy, such as the fluctuation of interest rates, persistent inflation and the increase in real estate prices. For these reasons he has proposed the need for measures for mortgage borrowers, just like the above. According to the Fund’s analysts, such measures would strengthen the resilience of households, while they would eliminate vulnerabilities in the banking system, against risks from housing loans. According to the BoE, these measures are binding in nature and take the form of maximum permissible limits for the debt service-to-income ratio at the time of approval and the loan-to-value ratio at the time of approval for new loans and other credits and will be implemented on January 1, 2025.