The sustained and persistent rise in real estate prices and related surge in volume of mortgages has prompted Luxembourg’s systemic risk committee (the “LSRC”), the Grand Duchy’s macroprudential authority, to issue on 9 November a recommendation to the CSSF to introduce stricter loan-to-value (“LTV”) standards with respect to the granting of loans for residential immovable property located in Luxembourg (the “Recommendation”).
The LSRC has issued such Recommendation in accordance with article 59-14a of the Law of 5 April 1993 on the financial sector, as amended.
Scope of the recommendation
The new standards, when implemented by the CSSF, shall apply to loans for residential immovable property located in Luxembourg, including repurchases of existing credit agreements, granted as of 1 January 2021 by Luxembourg incorporated credit institutions, insurance undertakings as well as other professionals performing lending operations to natural persons directly, or indirectly through structures such as so-called sociétés civiles immobilières.
Credit agreements already in force before 1 January shall however not be concerned by the new standards.
So as to ensure that domestic lenders do not suffer from a competitive disadvantage and to prevent that the new standards be circumvented by foreign lending institutions, the LSRC has recommended that the CSSF ask the other EU Member States’ regulators to recognise the new LTV standards.
LTV standards as recommended by the LSRC
In view of limiting the increase of household indebtedness in Luxembourg, the CSSF is being asked by the LSRC to set a maximum limit of 80% for the LTV ratio for all loans, including those loans granted in view of a purchase of real estate for rental investment purposes (i.e. buy to let).
Specific limits shall however apply to first-time buyers as well as to other buyers of real estate destined for principal residence.
As such the limit for first-time buyers shall be set at 100% LTV ratio, where such increased limit does not compromise the lending institution’s or the borrower’s solvency. Consequently it will remain possible for loans granted to first-time buyers to cover the entire value of the purchased real estate. The amount of the loan may however not exceed the value of the actual real estate.
A maximum limit of 90% LTV is established for other buyers of a principle residence, i.e. those buyers that already own real estate but wish to acquire a new main residence. Lending institutions are allowed a certain margin of flexibility with respect to such buyers and may, on limited occasions, increase the maximum limit to 100% LTV ratio.