Norwegian mortgage standards, CCB more stringent as rates eased

Jun 18th, 2015

Norwegian residential mortgage lending regulations will be tightened and the countercyclical buffer (CCB) for banks increased to 1.5%, the Ministry of Finance announced this week, while Norges Bank cut its key policy rate by 0.25% today (Thursday).

Siv Jensen

Norwegian minister of finance Siv Jensen

The increase in the CCB requirement from 1% to 1.5%, to come into effect on 30 June 2016, was announced today by the Norwegian Ministry upon the advice of Norges Bank, which yesterday formally delivered its verdict that imbalances in the household sector are increasing.

“We have now won some experience with setting the countercyclical capital buffer requirement, where Norges Bank’s assessments and advice have provided a good basis for the Ministry’s decisions,” said Minister of Finance Siv Jensen. “I have therefore been able to act quickly on Norges Bank’s advice.

The Ministry announced the measures to tighten mortgage lending on Monday to come into effect on 1 July, although these are only in place until the end of 2016. The new rules come after Finanstilsynet in March suggested that regulations, rather than existing guidelines, were required to lessen the risk of financial instability, in response to a query from the Ministry.

The move will turn from a guideline into a regulation an 85% cap on the loan-to-value (LTV) ratio of residential mortgage loans. The new regulation nevertheless allows some room for deviation from the cap by introducing a so-called “speed limit” that allows for 10% of a lender’s approved loans per quarter to be loans that do not meet the requirements for debt-servicing capacity, LTV ratio or repayments.

Lenders will also have to make allowance for an interest rate increase of 5 percentage points when assessing a borrower’s debt-servicing ability. For residential mortgage loans with a loan-to-value ratio above 70%, lenders will be required to demand repayments. These rules had also previously been in place as guidelines.

“I am confident that Norwegian lenders are prudent in their individual credit assessments, but the strong growth in lending and household indebtedness can be a risk factor for the Norwegian economy,” said Jensen.

Making the 85% LTV cap a regulation was among the proposals put forward by Finanstilsynet on 17 March. However, Finanstilsynet had also proposed that the mortgage rate increase used when stress-testing a borrower’s debt-servicing capacity be increased from 5 percentage points to 6 percentage points, and recommended more stringent amortisation and home equity credit line regulations that the Ministry of Finance did not take up.

The Ministry said the mortgage regulations will be continuously evaluated and will cease to have effect on 31 December 2016 unless an assessment shows the need for the measures to be extended.

The measures to tighten Norwegian household debt in particular come as the central bank today lowered its key policy rate by 0.25% from 1.25% to 1%.

“Developments in the Norwegian economy have been slightly weaker than expected and the economic outlook has deteriorated somewhat,” said Norges Bank governor Øystein Olsen. “The current assessment of the outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the course of autumn.”

Email this to someoneShare on LinkedInTweet about this on TwitterShare on Google+Share on FacebookShare on RedditDigg thisPin on PinterestShare on Tumblr
Tags: , , , , , , ,