The Bank of Albania sets a ceiling for home loans, 85% for the first home, 80% for the second

The Supervisory Council of the Bank of Albania decided at its meeting on Wednesday several restrictive measures for bank loans for homes.

More specifically, the decision provides for the determination of ceiling levels for the indicators "Loan-to-value ratio" and "Debt service-to-income ratio", for loans granted by banks for residential real estate.

The loan-to-value ratio is the percentage of the purchase price of the home that the bank undertakes to finance through the loan.

The loan-to-value ceiling in Lek will be 85% for the first home and 80% for the second home, while in foreign currency 75% for the first home and 70% for the second home.

While the debt service to income ratio represents the ratio between the installment or installments of the property loan, in relation to the income of the borrowers.

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The debt service to income ratio for loans in Lek will be at the level of 40% for the first home and 35% for the second home. In foreign currency, the ceiling level will be 35% for the first home and 30% for the second home.

According to the Bank of Albania, the implementation of these limits will enable the reduction of the risk of borrower failure and the reduction of banking losses related to these loans, as a result of unfavorable developments in real estate prices and in the country's macroeconomic framework, such as increased unemployment, falling incomes, increased interest rates, etc.

The Bank of Albania argues that these limits take into account and are adjusted to address risk proportionally, depending on the type of property and the currency in which the loan is granted.

At the same time, the decision provides a recommendation regarding the maximum maturity of residential real estate loans, which may serve banks to improve the risk profile of a given exposure.

 

The imposition of austerity measures on home loans also came as a result of recommendations from the International Monetary Fund (IMF). In an interview with "Monitor" in December 2024, the IMF suggested that the Central Bank set certain maximum levels for the ratio between the loan and the value of the property being financed, as well as for the ratio of debt service to borrowers' income (DTI).

In fact, the Bank of Albania had already expressed its concern about the rapid growth of housing loans last year. Initially, these concerns were attempted to be addressed through the introduction of a countercyclical capital surcharge, first introduced in June at 0.25% (to be implemented from 30 June 2025) and increased in December to 0.5% (to be implemented from 31 December 2025).

However, due to the high actual capitalization levels of the banking sector, such a measure has not yet had a significant impact on slowing lending. For this reason, the Bank of Albania has decided to follow the IMF recommendation and impose direct restrictions on risk management standards related to housing loans.

Bank of Albania data showed that last year new housing loans reached a new historical record of 54.9 billion lek or about 545 million euros, calculated at the average exchange rate of 2024. New housing loans increased by 13% compared to 2023.

The value of the active portfolio or outstanding home loan at the end of 2024 reached almost 208.7 billion lek, with an annual growth of 15.5%./ Monitor