Decline in loans with a high loan-to-value ratio

• “The survey shows a decline in loans with a high loan-to-value ratio, in particular for younger home buyers. The volume of additional collateral has also risen somewhat. However, the proportion of loans with a high loan-to-value ratio remains high,” says Finanstilsynet's Director General Bjørn Skogstad Aamo, who points out that 34% of mortgages for home purchase were in excess of 90% of property value.
• “Compliance with the guidelines for good home mortgage lending practices will be subject to active oversight and, if necessary, followed up with stricter regulation,” says Mr Skogstad Aamo.

Finanstilsynet published “Guidelines for prudent lending practices with regard to loans for residential purposes” in March 2010. The survey of home loan practices conducted in autumn 2010 was modified in that light.

Banks have taken a while to bring their internal guidelines into line with Finanstilsynet’s guidelines, and there may also be a time-lag effect in putting the guidelines into practice. This could explain the absence of a sharp decline in loans with a high loan-to-value ratio.

Finanstilsynet will, based on thematic inspections at banks in 2011 and a new home mortgage loan survey, check whether the guidelines are having sufficient impact on banks’ home loan practices. If they are not, stricter regulation will need to be considered, a possibility envisaged in the recommendations made in the Financial Crisis Commission’s report of January 2011.

Survey findings:

• 21% of mortgages for purchase and refinancing purposes alike exceeded 90% of property value – which is Finanstilsynet’s recommended upper limit for home loans. This is 8 percentage points lower than in the corresponding survey in autumn 2008. Loans in excess of property value accounted for 9% of the portfolio, 4 percentage points lower than in 2008. In the case of loans exclusively for home purchase, 34% had an LTV ratio in excess of 90%, which is 17% lower than in 2008.
• In the case of loans for home purchase to the under-35s, 45% exceeded 90% of property value, a decline of 14 percentage points compared with 2008. 20% of loans exceeded property value compared with 30% in autumn 2008.
• In the case of loans in excess of property value, 62% had additional collateral compared with 52% one year previously. 41% of loans exceeding 90% of property value had additional collateral.
• Fixed interest loans accounted for 3% of aggregate loans covered by the survey. The low proportion of fixed interest borrowing in Norway means that borrowers rapidly feel the effects of changes in interest rate levels. Just over one in six loans was interest-only, a somewhat higher proportion than in the 2009 survey. Interest-only mortgages are seen above all in the youngest and oldest age groups.
• A separate survey of home equity lines of credit showed wide variation in utilisation ratios (amount drawn in per cent of ceiling granted) depending on borrower age. Younger borrowers’ utilisation ratios are on average substantially higher than those of their older counterparts. Almost 90% of loans covered by the survey were in compliance with Finanstilsynet’s recommendation of a maximum loan-to-value ratio of 75% for home equity credit lines.

About the survey:
Finanstilsynet has conducted surveys of banks’ home loan lending practices since 1994. The survey dating from autumn 2010 covered the 30 largest banks, accounting for about 85% of aggregate home mortgage loans in Norway. The survey gathers both quantitative and qualitative information on a sample of loans secured on dwellings.