Mortgages for income properties finma recognizes revised self-regulation

For yield properties, the borrower must contribute at least a quarter of the loan-to-value as equity. (Image: Shutterstock)

Finma recognizes the adapted self-regulation of the banking sector on mortgage financing as a minimum standard. The changes tighten the requirements for loan-to-value ratios and amortization on mortgages for investment properties.

The Financial Market Authority (Finma) has long pointed out the overheating tendencies in the residential real estate sector. If individual institutions take on too much risk, it does intervene. But such measures are backward-looking and affect only individual banks and therefore have only a limited impact on the general risk situation in the overall market. Therefore, Finma has demanded a regulatory adjustment, which has an area-wide and dampening effect on the demand for particularly risky mortgage loans for investment properties.

Against this background, Finma welcomes the fact that the Swiss Bankers Association (SBA) has adjusted its minimum standards in the area of mortgage financing of investment properties, according to a media release on Wednesday. Finma will also incorporate the new rules into its insurance capital requirements to avoid competitive distortions.

This self-regulation now stipulates that, in the case of mortgage financing for income properties, the borrower must contribute at least one quarter of the loan-to-value ratio as own funds, instead of only the previous ten percent. The so-called lower-of-cost-or-market principle still applies, according to which any difference between the higher purchase price and the lower loan-to-value must be financed entirely with the couple's own funds. In addition, the mortgage debt must now be amortized to two-thirds of the loan-to-value within a maximum of ten (previously fifteen) years. The tightening affects only new business, but neither existing financing nor the existing standards in the area of owner-occupied housing. The rules come into force on 1. January 2020 in force.

Private second home ownership is not covered

The definition of income property set out in the revised self-regulation by the SBA excludes the so-called "buy-to-let"-segment is not explicitly a. These are generally condominiums and single-family homes owned by private individuals, which are rented out rather than occupied by themselves. According to Finma, this segment accounts for around a quarter of all residential mortgage lending by banks. It believes that this segment should also be treated equally due to its risk potential. The effectiveness of the tightening of self-regulation is not explicitly assessed due to the fact that the "buy-to-let" segment is not taken into account-Financing restricted. FINMA therefore recommends that banks voluntarily apply the stricter capital adequacy and amortization requirements to the financing of buy-to-let-and emphasizes that it will continue to monitor this segment as part of its supervisory activities and, where necessary, take measures at individual institutions.