In a significant policy shift, the Czech National Bank (ČNB) has announced the relaxation of mortgage restrictions, effective from January 2023. The key change involves relieving banks from the obligation to adhere to the maximum limit of an applicant’s total debt to annual income (DTI). However, the central bank has opted to maintain the second indicator – the maximum ratio of the mortgage loan amount to the value of the pledged property (LTV) – at the existing level.

Karina Kubelková, a member of the ČNB banking board, emphasized that despite the removal of the DTI limit, the LTV indicator would persist due to ongoing macro-financial uncertainties. Kubelková highlighted the risk of a substantial property price decline, necessitating the retention of the LTV indicator as a risk management tool. The decision acknowledges the impact of higher interest rates and subdued mortgage activity in mitigating risks associated with applicants’ incomes, leaving risk management responsibilities to mortgage providers.

Previously, the total debt limit for applicants, expressed as multiples of their net annual income, stood at 8.5, with a higher limit of 9.5 for applicants under 36 years. The ČNB’s decision to abolish this limit reflects confidence that higher interest rates act as a safeguard against potential risks linked to income levels, allowing mortgage providers greater autonomy in risk management.

Since July, the ČNB had already ceased requiring the application of the limit on the amount of debt repayments to net monthly income (DSTI). The sole remaining limit is the LTV, which will persist at 80 percent, and for applicants under 36 years, it will be capped at 90 percent.

In the same meeting, the banking council opted to keep the rate of the countercyclical capital reserve unchanged at two percent. This reserve is designed to protect the credit market by acting as a buffer against risks arising from excessive loan growth, potentially curbing the expansion of riskier loans. The decision underscores the ČNB’s commitment to maintaining a prudent regulatory environment amid evolving economic conditions.

Article by Prague Forum