2023-08-01 22:00:00
Declining credit volumes also mean fewer exceptions. Need for reform of the KIM regulation: Rent is becoming more expensive and sometimes weighs more on income than a loan installment.
From July 21, 2022 to June 21, 2023, the European Central Bank (ECB) raised its main refinancing rate in eight steps from 0.00 to 4.00 percent and the next interest rate step of a further 0.25 points took place two days ago. According to data from the Austrian National Bank, the volume of new loans granted increased steadily in 2019 (+13.3 percent), 2020 (+13.0 percent) and 2021 (+8.7 percent). With a decline of 9.7 percent, the long-term trend in the previous year 2022 was broken, with all declines occurring between August and December 2022. This development was significantly influenced by the measures taken by the banks and credit institutions – Real Estate Financing Measures Ordinance (KIM) – which have been in force since August 2022.
The restrictive credit regulations in Austria hit young families particularly hard
Young families are particularly affected by the particularly restrictive regulation in Austria, which – even with good equity capital and creditworthiness – in many cases does not meet the requirements of the KIM. A major hurdle is the maximum debt ratio of 40 percent of monthly net household income with a maximum loan term of 35 years.
“The reason for this is that the KIM does not sufficiently take into account the specific life situation of young families – such as further training and parental leave periods,” says Christoph Kirchmair, founder and CEO of Infina, an independent credit broker specializing in real estate financing. Internal Infina evaluations for 2023 show that the share of the age segment 18 to 35 years has decreased from 41.1 percent to 36.9 percent.
“Since the introduction of the KIM, it has become clear that the desire of many young families to have their own apartment or home is becoming increasingly difficult to achieve. Instead of investing in residential property with real value security, they increasingly have to switch to the rental market,” criticizes Kirchmair: ” In most cases, however, rents are linked to the level of inflation, which means that the financial burden – especially in times of sharply rising living costs – becomes a long-term problem.”
The KIM initially limits the maximum term of real estate loans to 35 years. However, the regulation provides for exceptional quotas for a maximum of 20 percent of a bank’s loan volume in total, with only five percent of the loan volume being granted as real estate loans with terms of more than 35 years. Kirchmair: “In practice, longer maturities are the most important lever to enable young families not to exceed the maximum monthly debt service ratio.” The problem is shown by the following case of a young family who financed a condominium with a net loan amount of 350,000 euros through Infina in January 2022. The young family with a child had a net household income of 3280 euros. The financing rate was concluded at 1029 euros (fixed interest rate nominal 1.25 percent, 35-year term, 25-year fixed interest rate). The KIM limits the maximum monthly credit rate to 1312 euros through the 40 percent rule. “In July 2023, the monthly loan installment at a current fixed interest rate of 3.875 percent nominal with the same term and fixed interest period for the family would now be 1550 euros and thus well above the 40 percent rule,” the expert calculates.
Lending to young families in Austria: Challenges and need for action for terms over 35 years
Individual banks and credit institutes in Austria have recognized the needs of young families and offer terms of 40 years from the exceptional contingent. This improves the situation for young families, but the current market development is preventing a lasting relaxation, explains Kirchmair. Because the entire loan volume is collected every six months. Due to its general decline, the volume of credit that can be granted within the framework of exceptional quotas also decreases. As a result, the scope for banks and credit institutions to grant loans with terms of more than 35 years will be even more limited in the second half of 2023 than it is today.
“Since the KIM came into force, the economic environment has changed massively. An increase in the maximum five percent share of the loan volume for real estate loans with longer terms would be an effective measure to counteract these developments in terms of better opportunities for young families to create affordable home ownership There is now a need for action,” Kirchmair appealed to those responsible.
On average, real estate purchased in the recent past has to be paid off longer due to higher interest rates, since disposable income has not increased to the same extent so far. “Currently, real estate loans with a term of 30 years and a fixed interest rate agreement of the same length are even cheaper than real estate loans with shorter fixed interest rates.” In concrete terms, this currently means 4.1 percent for a one-year fixed interest rate, 3.0 percent for a ten-year fixed interest rate, 2.9 percent for a 20-year fixed interest rate and 2.6 percent for a 30-year fixed interest rate. In addition, there is a standard bank surcharge of 1.0 to 1.25 percent.
Real estate loans: trend towards longer maturities and the impact of the ECB interest rate hikes
“Even today, it is still important for young people to repay the real estate loan as quickly as possible. Nobody likes to be in debt. But the ECB’s ongoing key interest rate hikes are explicitly forcing borrowers with less own funds into ever longer loan terms,” reports Infina network partner Pablo Viveros: “Through the currently lower price for long fixed interest rates and maturities, the awareness of longer loan terms is increasing in order to make financing possible at all.” In the long run, a 35-year loan term might become the new standard. Austria-wide data from Infina shows that in 2021, 63 percent of all borrowers would still be able to get by with a mortgage loan for a period of 30 years or less. This share fell to 55 percent in 2022 and is currently only 48 percent.
The increasing popularity of variable-rate loans harbors risks: Why a long-term fixed interest rate commitment offers security
“Despite the currently low fixed interest rates, more borrowers are once more taking out loans with variable interest rates. According to the Austrian National Bank, their share of new business increased from 47.2 percent in Q4 2022 to 57.5 percent in Q1 2023,” says Kirchmair: “Similar to the previous foreign currency loans and the large proportion of borrowers who refrained from long-term interest rate hedging during the low-interest phase, it will become clear over time whether this willingness to take risks will not have to be paid dearly once more.
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