Recommendation (FMSB/1/2023) on the KIM-V

In its 35th meeting on February 13, 2023, the Financial Market Stability Board (FMSB) focused on developments in residential real estate financing observed since the introduction of the regulation for sustainable lending standards for residential real estate financing (KIM-V) and on any necessary adjustments to this regulation.

Important developments in mortgage loans to households

In the second half of 2022, interest rate and inflation hikes visibly dampened the demand for real estate and thus also for real estate loans – not just in Austria but in the entire euro area and worldwide. The FMSB particularly points to developments in Germany, which has a real estate market that is similar in structure and dynamics to the Austrian one. It found that the decline in new lending in Germany more or less matches the decline seen in Austria, although Germany has not implemented any borrower-based measures.

The FMSB also analyzed new data on lending standards that had become available since its last meeting. It found that, though lending standards in the overall market improved in the third quarter of 2022, a large share of loans were still being granted on unsustainable terms within the meaning of the KIM-V and the FMSB’s guidance. We need to bear in mind, however, that the KIM-V was not yet in force in the first month of the third quarter of 2022.

What is more, the share of new variable rate loans has increased markedly since mid-2022. In this context, the FMSB reiterated that in the course of its 31st meeting it had adjusted its guidance on sustainable mortgage lending to households to include an upper limit for the debt service-to-income ratio for variable rate loans1.

FMSB recommends refining existing measures to ensure sustainable mortgage lending

In the FMSB’s view, the issues outlined above confirm the necessity of the KIM-V. That said, the FMSB thinks that it would be advisable to further develop the KIM-V following up on the discussion during its previous meeting.

Therefore, the FMSB recommends to the Financial Market Authority (FMA) to adjust the regulation as follows: Bridge loans that are related to a change in residence by borrowers or their relatives should be excluded from the KIM-V’s scope of application. In view of realization risk, such bridge loans may amount to a maximum of 80% of the market value (estimated in line with the CRR2) of the property that is to be sold and must not have a maturity of more than two years. To avoid excess fluctuations, the FMSB recommends defining a lower bound of one million euro for a credit institution’s exemption bucket. Moreover, the FMSB recommends applying the current exemption amount to each person individually if couples take out a loan together.

The FMSB further recommends to the FMA to exclude the portions of loans that are funded through nonrepayable grants by regional governments from the KIM-V’s scope of application for a maximum period of two years, as these portions only temporarily increase borrowers’ debt level.

These refinements will, on the one hand, increase the flexibility of the KIM-V and, on the other hand, ensure that additional risks arising from such flexibility remain limited. The FMSB would like to reiterate that, by international comparison, the available exemption buckets are already generous as is.

The FMSB recommends that the suggested changes enter into force from April 1, 2023, together with the related changes in reporting requirements.

Information on the FMSB

The FMSB, which became operational in 2014, works toward strengthening financial stability. Its members are representatives of the Austrian Federal Ministry of Finance, the Fiscal Advisory Council, the Financial Market Authority and the Oesterreichische Nationalbank. In particular, the FMSB may issue recommendations to the Financial Market Authority and provide risk warnings.

1Upper limit of 30% for the debt service-to-income ratio for loans with a maturity of more than five years if the period for which interest rates have been locked in is less than half of the maturity period.
2Market value of the property pursuant to Article 4 (1) (76) Regulation (EU) No 575/2013.