Upper limit on the payment-to-income ratio protects households as a debt cap

Excessive household indebtedness is a harmful phenomenon from macroeconomic, financial stability and social perspectives. First, it may lead to the build-up of large imbalances (e.g. asset price bubbles). Second, it may necessitate more severe deleveraging by banks during an economic downturn. Household borrowing in foreign currency increases the country’s external vulnerability, given the fact that such loans are financed by foreign currency funds. Finally, excessive household indebtedness poses a significant social problem, as the number of households unable to service their debt may increase significantly, which in turn may lead to evictions. In Hungary, many families have been caught in a debt trap, due to the build-up of foreign currency loans in the period between 2003 and 2008.

Consistent with its mandate provided by the new MNB Act in force from 1 October 2013, the MNB, as a macroprudential authority, has adopted a Decree to prevent the excessive outflow of household credit. The Decree has the same position in the legal hierarchy as government decrees. The new provisions, to be introduced from 1 January 2015, must be applied for all new loan agreements made in the territory of Hungary. Basically, the new regulation consists of two pillars. The payment-to-income ratio (PTI) will limit the maximum initial debt-servicing burden as a percentage of customers’ regular legal income, thereby moderating the accumulation of household debt. The loan-to-value ratio (LTV) will cap the maximum amount of secured household lending (e.g. mortgage loans) as a percentage of the value of collateral (the value of the property).

Banks will have to calculate the payment-to-income ratio for all new borrowing (consumption loans, mortgage loans, car loans, etc.) in excess of HUF 200,000. The ratio must take into account repayment amounts in respect of all existing loans of the borrower; and only proven net income (wage, pension, family allowance, etc.) can be included in disposable income. This will clearly help reduce the grey economy, as in the future only borrowers with reported, legal income will have access to credit.

The payment-to-income ratio for all new forint loans taken out after 1 January 2015 may not exceed 50% and, for high-income borrowers (i.e. for those with a HUF 400,000 net salary or above), it may not be higher than 60%. If there are more than one debtors, incomes and debt burdens must be treated on an aggregate basis. Due the more lax limits applied to forint loans, the new regulation presumably will not lead to a cut-back on lending; however, if an excessive increase in household borrowing is perceived by the MNB as a macroprudential authority, the limits can be tightened at any time.

PTI limits on euro and other foreign currency loans will be much stricter, in order to offset the negative effects of potential exchange rate depreciation: 25% and 10% and, for higher-income customers, 30% and 15%, respectively. With the imposition of these limits, the extension and renewed build-up of foreign currency lending can be ruled out.

In respect of the loan-to-value ratios, the rules currently in force have been transposed into the MNB Decree, in order to ensure the continuity of the regulation.

The MNB consulted with the European Central Bank, which, in its opinion issued on 23 June 2014, gave a positive assessment of the contents of the draft Decree and its expected contribution to strengthening the stability of the domestic financial system. The MNB also consulted with market participants, and several remarks were incorporated into the draft regulation, thereby facilitating the smooth application of the Decree in the future. 

The text of the MNB Decree is expected to be published in the Hungarian Official Gazette in September 2014.

Maximum payment-to-income and loan-to-value ratios

* LTV caps 5 percentage point higher can be applied to financial leasing.

Magyar Nemzeti Bank