The banks that have responded to the quarantine are changing their home loan policies again today: what initial contribution may be necessary

Mortgage credit recovers

The credit market, as in other financial and economic fields, underwent a series of changes during and after the quarantine. According to T. Garbaravičius, Advisor to the Chairman of the Board of the Bank of Lithuania, the good news is that home loans have recovered.

“In July-August, the volumes of home loans were similar to the previous years in 2018-2019. Looking at all these years, January and February were quite active, then there was a fall and finally a recovery in June-July ”, says the economic expert.

According to T. Garbaravičius, monthly loan volumes for new homes fell by 20-30 percent during the quarantine. According to the expert, this is a really high number: “However, it should be noted that along with the lower number of new loans, loan repayments (amortizations) also decreased as people requested deferred credit payments. Therefore, the total loan portfolio did not decrease, but continued to grow. In August, for example, the annual growth of the portfolio was 8.9% “.

Why have loan repayments decreased? Some residents took the three-month credit license allowed by law, while others took advantage of the moratorium on loan repayment imposed by banks. People deferring loan payments reinforced another trend: increasing amounts of money in people’s bank accounts.

“In August, some borrowers started to pay back their full loan installments. Suspensions of principal repayments were one of the reasons we saw increasing volumes of deposits. People have become more cautious in general, accumulating funds in their accounts and deferred loan payments were another reason why the amount of deposits in banks increased significantly ”, emphasizes the representative of LB.

The conditions are already less strict

The real estate market is highly dependent on bank credit policies. According to T. Garbaravičius, the first question from banks, property developers and buyers after the start of the quarantine is whether there will be a correction in the prices of residential properties. Banks took immediate action: they tightened credit conditions.

“The initial reaction of the banks was to tighten the requirements for the initial contribution, that is, to reduce the loan-to-value ratio. The adjustment was significant enough, sometimes even requiring 30 percent. initial contribution and, in some cases, even more. Still, the loans didn’t stop, it was important to have a higher down payment. According to our data, even during the ‘peak’ of quarantine, the median loan-to-value ratio remained at 80%, although there was a significant increase in loans with much higher initial contributions, “recalls the interviewee.

According to the LB representative, the number of loans issued with 15% has increased again. initial contribution, although banks usually ask for 20%. initial contribution.

“A recent LAC survey was conducted on the real estate market. It shows that banks were significantly more cautious and skeptical about the housing market than other market participants surveyed. “This was reflected in a higher down payment requirement, although the latest survey shows that banks’ expectations have gotten a bit more positive, they are no longer as cautious, as evidenced by the rarer number of new loans with down payments. relatively high, “he said.

Depreciation continues to decline

According to the Bank of Lithuania, about 40 percent. housing by number of transactions and 70-80 percent. bought at home equity with mortgages. Therefore, according to T. Garbaravičius, if banks tightened the taps on loans, the real estate market would not collapse, but would face considerable challenges. During the quarantine, according to the interlocutor, the banks began to be very cautious in assessing the sectors directly related to the state closure and social contacts: catering, accommodation, tourism, air transport, etc. however, as the situation abated, he saw that the situation was not and probably would not be as bad as previously thought.

“It turned out that people accepted the quarantine and its challenges as temporary shocks, and this is probably one of the reasons why the economy recovered so quickly and at least Lithuania appears to have been one of the countries least affected by the quarantine.” If people treat shock as temporary, at the end of the shock, their behavior quickly reverts to previous normal clues. We saw that. Of course, there were other factors like people did not go on vacation abroad and so on. It seems that this intuition was temporary and people did not accept the situation as an irreversible structural shock or a shock that will lead to a longer economic recession ”, thinks the economist.

T. Garbaravičius estimates that although in recent months the flows of new loans are around 10 percent. lower than in 2019, loan amortization (repayment) is lower, so the loan portfolio itself continues to grow.

“Lending may not reach last year’s volumes in the coming months, but the current level is really good. However, developers are still considering whether to continue working to the same extent as before the quarantine or to slow down. , so it is difficult to say how much they will build and how many new housing offers will be available ”, says the expert.

Stronger competition is reducing mortgage interest margins

The residential real estate market and housing credit, according to the interlocutor, seem quite optimistic. According to T. Garbaravičius, the slightly lower interest margins on home loans also contribute to this due to increased competition.

“Mortgage interest margins have been declining recently, with the median margin falling from about 2.3% to 2.2% since the beginning of the year. This trend of moderate decline also did not fade during the quarantine, as banks fell back. they protected from risks by demanding a higher initial payment. The loans have been driven by both large and small mortgage lenders “, emphasizes the economic expert.

When asked if it is worth taking out a loan right now, T. Garbaravičius says that this is a very individual issue and that each home buyer should assess their financial capabilities and housing needs. If housing is necessary for life, it is generally not worth trying to predict the direction of housing prices.

“If you need a home, you have to buy it. You will not have to wait long, because it is very difficult to predict changes in property prices and hit bottom. Housing is one of the most necessary purchases and, if necessary, the economic possibilities. allow, it is really logical to consider buying a home with a loan ”, says the expert.