MNB modifies the debt cap rules with the aim of encouraging expansion of fixed rate housing loans

18 June 2018

To ensure the safety of mortgage borrowers and to promote the expansion of housing loans with predictable instalments and fixed interest rates, the debt cap rules will be amended from this October. Instalments of housing loans with a shorter interest rate fixation period can change frequently, also in unfavourable directions. Therefore, customers with such loans must maintain sufficient financial buffers to be able to safely repay their debts.

The Magyar Nemzeti Bank uses several instruments, including the Certified Consumer-Friendly Housing Loan (CCFHL) certification system, the Mortgage Funding Adequacy Ratio (MFAR), long-term interest rate swaps and mortgage bond purchase programmes to encourage the expansion of mortgage lending with longer interest rate fixation periods. Reducing the ratio of floating-rate loans and increasing the share of fixed-interest loans with longer interest rate fixation periods are crucially important for mitigating households’ exposure to interest rate risk.

With this goal in mind, the MNB’s Financial Stability Board has decided to modify the rules relating to the Payment-to-Income Ratio (PTI). From 1 October 2018, the amount of monthly instalments of HUF mortgage loans with interest rate fixation periods of less than five years may not exceed 25 percent – or in the case of higher incomes 30 percent – of borrowers’ regular monthly net income . The ratios for mortgage loans with interest rate fixation periods of more than five years but less than ten years may be 35 and 40 percent, respectively. Due to the lower interest rate risk, PTI limits on forint mortgage loans with interest rates initially fixed at least for ten years or for the full term of the loan have been left unchanged at the current 50 and 60 percent, respectively. In the case of lending in currencies other than HUF, lower limits must also be applied to mortgage loans with shorter interest rate fixation periods. The changed rules ensure that customers exposed to interest rate risk have adequate financial buffers, preparing themselves for any adverse changes in instalments.

Simultaneously, the preferential 85-percent weight calculation currently used for instalments of mortgage loans with interest rate fixation periods of at least five years will be withdrawn, as the changing debt cap rules treat loans with a longer interest rate fixation period more prefentially. The changed rules will have to be used only for new mortgage loans with a maturity of at least five years.

Expected PTI rules on forint mortgage loans from 1 October 2018

The MNB has already consulted with market participants and seeked the opinion of the European Central Bank on the revision of the PTI rules . The modifications will take effect after the process is closed, following the finalisation and promulgation of the Decree.

Under the PTI rules, higher income allows for borrowers to undertake proportionately higher instalments. From 1 July 2019, in response to the increase in nominal and real wages in recent years, the Decree allows to undertake higher instalments at or above HUF 500,000 of monthly income instead of the current HUF 400,000.

As a result of the changes in the debt cap rules, the expansion of household lending can take place in a better quality, i.e., in a healthier structure and in a more sustainable way. As a result of the changes, no material negative effect on credit volumes is expected, as currently borrowers are not overstretched in terms of income.

Taking out a mortgage to buy or improve a home is one of the most important decisions for families. Appropriate debt cap rules prevent customers from becoming overindebted, while risks arising from movements in lending interest rates are mitigated and instalments on mortgages become more predictable. As a result, it will be significantly easier to plan family budgets, which is of paramount importance from a social and financial stability perspective.

Magyar Nemzeti Bank