FINMA recognizes the adjusted self-regulation by the Swiss Bankers Association (SBA) in the area of mortgage lending for investment properties as a binding minimum standard. The changes will tighten the requirements for the loan-to-value ratio and the amortization of mortgage loans for investment properties. The tightened rules apply to new borrowers, but not to the existing loans or the existing standards related to owner-occupied residential property. The rules will come into force on January 01, 2020.
The self-regulation now requires borrowers to provide a minimum down payment of at least a quarter of the loan-to-value ratio, instead of the current 10%. The lower of cost of market principle continues to apply, whereby any difference between a higher acquisition price and lower loan-to-value ratio is to be financed entirely with the own funds of the borrower. In addition, the mortgage is now to be amortized to two-third of the loan-to-value ratio of the property within a maximum of 10 years (currently 15 years).
FINMA has been drawing attention to signs of overheating in the residential investment property for some time. FINMA intervenes when individual institutions take on excessive risks, but such measures are always backward-looking and only apply to individual banks. These measures, however, only have a limited impact on the general risk situation across the market. Therefore, FINMA had demanded a change in regulation that would curb the overall demand for particularly risky mortgage loans for investment properties. For this reason, FINMA welcomes the adjustments of SBA to its minimum standards in the area of mortgage lending for investment properties. FINMA will also adopt the new provisions in its capital requirements for the insurance sector, in an effort to prevent distortions of competition.
The definition of investment property, as set out in the revised self-regulation of SBA, does not expressly include the buy-to-let segment. This segment makes up nearly a quarter of all loans granted by banks for residential investment properties. FINMA takes the view that this segment ought to be treated in the same way due to its risk potential. The effectiveness of the tightened self-regulation is limited due to the exclusion of mortgages for buy-to-let properties. FINMA is, therefore, recommending that banks voluntarily also apply the stricter capital and amortization requirements to loans for buy-to-let properties. FINMA will continue to monitor this sector closely as part of its supervisory work and will, where necessary, take measures aimed at individual institutions.
Related Link: Press Release
Effective Date: January 01, 2020
Keywords: Europe, Switzerland, Banking, Insurance, Capital Requirements, Amortization Requirements, Swiss Bankers Association, Mortgage Lending, LTV, LVR Restrictions, Credit Risk, FINMA
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