Mortgages will once again become more accessible to a wider group of people. The Czech National Bank (ČNB) has abolished the limit on the maximum monthly loan installment in relation to the borrower’s income. Starting July 1, 2023, banks will no longer be required to follow the DSTI parameter, which represents the ratio between the applicant’s total monthly loan installments and their net monthly income – essentially, how much of their income goes toward debt repayment.
“In times when we are fighting increased inflation, it is necessary to follow strict conditions for providing mortgages. However, with higher interest rates, the DSTI indicator is no longer needed,” said ČNB Governor Aleš Michl at Thursday’s press conference presenting the Financial Stability Report.
According to Karin Kubelková, a member of the ČNB board, the number of new mortgages dropped significantly in the spring of this year. The central bank attributes this mainly to high interest rates, which have intentionally slowed down the mortgage market.
The LTV (loan-to-value ratio) limit remains at 80%. This means that most borrowers will need at least 20% of the property’s value from their own funds. For applicants under 36 years of age, the LTV limit remains increased to 90% – they only need 10% of their own funds. Banks can apply a 5% exception for mortgages with a higher LTV, but they must act with “particular caution.”
Libor Holub, Director of the ČNB Financial Stability Division, said that banks had been fully compliant with set mortgage limits. He does not expect that the removal of the DSTI requirement will cause instability in the Czech financial system. “Banks are being given more room for lending activity, but we believe that with high interest rates, households will remain cautious, and banks will carefully assess debt service risks,” he added.
DSTI stands for Debt Service to Income. Debt service means the borrower’s total loan repayments, and income refers to their net monthly income. DSTI is expressed as a percentage. For example, DSTI at 40% means that a borrower spends 40% of their monthly net income on debt repayment, including consumer loans, overdrafts, credit cards, other mortgages, and the new mortgage being applied for.
DSTI is one of the key indicators used by the ČNB to regulate and protect the financial system, borrowers, and banks. Its main goal is to prevent excessive indebtedness and loan defaults. Since April 2022, the ČNB set the upper DSTI limit at 45%, meaning that total loan repayments could not exceed 45% of the applicant’s net monthly income (50% for borrowers under 36 years old).
Along with LTV and DTI indicators, DSTI had been mandatory for banks to follow when approving mortgages. However, from July 1, 2023, banks will no longer be required to observe the DSTI limit.
