The Danish FSA is currently conducting a public consultation on new guidelines for mortgage lending in areas with significant price increases. Currently, such areas would be Copenhagen and its suburban areas, as well as Aarhus. It is not the FSA’s perception that there currently is a bubble in housing prices, but the conditions for a bubble are present in the current economic environment of low interest rates and rising house prices. The guidelines reflect the results of an analysis of best-practices amongst Danish credit-institutions in relation to how they in their credit granting processes take into account potential price corrections or decreasing sales activities in the housing market.
The public consultation ends on November 25th, 2015.
The 7 best-practices contained in the guidelines are as follows:
Institutions must assess the customer’s affordability under the scenario of interest rate hikes, when granting adjustable rate loans for housing. The aim is mainly to ensure that borrowers with a limited disposable income do not run a higher risk if the interest payment should increase.
Institutions, when granting loans for buying shares in cooperative housing associations, must “stress” the relevant association’s debt under the scenario of interest rate hikes. Institutions must then take the results from such stress into account, when calculating the borrower’s disposable income.
3. best practice:
Borrowers with negative equity must amortize sufficiently.
4. best practice:
Borrowers with high debt-to-income ratios must have a robust and positive net wealth even in a scenario of falling house prices or high job security and fixed interest rate and amortization.
5. best practice:
When a borrower buys a new home before the old one is sold, the borrower must be able to pay interest and principal payments on both homes until the institution expects the old home to be sold (though a minimum of 6 months). If a borrower has more than two residences, the borrower must be able to pay interest and principal payments on all the homes during the period the borrower is likely to own them (though a minimum of 12 months).
6. best practice:
A borrower’s disposable income must always be assessed individually. It is not sufficient that the disposable income lies above a pre-defined minimum threshold.
7. best practice:
When financing the purchase of shares in cooperative housing associations, institutions must review the association’s underlying financial status (annual reports and budget) to ensure that the borrower is buying in a healthy association.
Further information (in Danish) can be found here