News
New lending standards for residential real estate loans
The aim is to achieve sustainable lending
The Credit Institutions Real Estate Financing Measures Ordinance (“KIM-VO”) of the Financial Market Authority (FMA) establishes new lending criteria for private residential real estate loans. The regulation was announced June 17, 2022 and is based on a recommendation of the Financial Market Stability Board (FMSG) as well as an expert opinion of the Austrian National Bank (OeNB) pursuant to section 23h of the Austrian Banking Act. The objective of these measures is to reduce identified changes in the intensity of systemic risk in residential real estate debt financing. The aim is to achieve sustainable lending. The focus is on the borrower’s ability to repay the loan.
The new lending criteria for private residential real estate financing provide a maximum loan-to-value ratio of 90% and restrict the maximum term of financing to 35 years. In addition, there is also an upper limit for the debt service ratio of 40% (ratio of interest and principal payments to the borrower’s income).
Pursuant to Section 5 of the KIM-VO, residential real estate financing is exempt if the total of all outstanding loan liabilities of the borrower (including those to be newly concluded) does not exceed EUR 50,000 (borrower-related de minimis limit). The upper limit for exempt financing is 2% of all new private residential real estate financing agreed by the borrower. Furthermore, there are institution-related exemption quotas that allow credit institutions to exceed the prescribed upper limits pursuant to section 4 of the KIM-VO. These are a maximum of 20% for the (i) loan-to-value ratio, a maximum of 10% for the (ii) debt service ratio and a maximum of 5% for the (iii) maturity of the newly agreed private residential real estate financing.
Scope of application:
The regulations apply to domestic credit institutions and foreign credit institutions with a branch in Austria. Credit institutions which offer loans in Austria from abroad under the European freedom of services are not covered. Private residential real estate financing is deemed to exist if the construction or acquisition of residential real estate for consumers is to be financed. As an additional applicability criterion, the regulation stipulates that the loan must be secured by a domestic property or at least one borrower must have his or her primary residence in Austria. Excepted are, among others, extensions of existing financing up to the amount of the outstanding residual liability.
Furthermore, the regulations only apply to “new” residential real estate financing, i.e., financing newly concluded after the KIM-VO enters into force on July 1, 2022. In the case of increases, only the amount of the increase calculated in comparison to the outstanding amount is considered to be actually new and thus relevant residential real estate financing.
Outlook:
The review process for the new regulation has been completed since May 20, 2022. There was a lot of critical feedback from the banking sector. In particular, more exemptions and a higher de minimis threshold are being called for. The regulation is to come into force on August 1, 2022, and automatically expire again on June 30, 2025. As a result of suggestions and discussions during the review process, the de minimis threshold was increased from EUR 40,000 to EUR 50,000, contrary to the first draft of the regulation.
The commencement of the KIM-VO raises the question of the extent to which real estate seekers have access to alternative forms of financing. Property developers could also be encouraged to consider lease-purchase models or models with purchase price installments in order to close any financing gaps. In any case, developers should give some thought to this, as the planned measures will in any case reduce the liquidity available for the planned purchase of real estate.