The impact of a maximum loan-to-value ratio on the borrowers’ expenditure

Date 20/12/2010

Economic commentary: The impact of a maximum loan-to-value ratio on the borrowers’ expenditure

Finansinspektionen has recently implemented a ceiling for the loan-to-value ratio of 85 per cent – that is for how much it is possible to borrow in relation to the market value of the underlying collateral - for new mortgages.

 

In this commentary the authors use sample data from the home loan survey commissioned by Finansinspektionen to estimate the impact of the new guidelines on the expenditure on borrowing. The results indicate that a maximum LTV ratio of 85 per cent will correspond to an interest rate increase of about 1.5 percentage points for new borrowers with high LTV mortgages. Only about 20 per cent of new mortgages have an LTV ratio above 85 per cent, meaning that the majority of new lenders will not be affected by the new guidelines. However, given that the turnover rate for the whole outstanding mortgage debt averages four to five years, the LTV restriction is likely to become binding after a period of five years.