Switzerland’s independent financial-markets regulator FINMA has recognised as a new minimum standard rules proposed by the banking sector governing mortgage loans for investment properties, the Bern-based authority said on Wednesday (Aug.28).
The adjusted self-regulation set by the Swiss Bankers Association (SBA) will require borrowers to provide a minimum down payment of at least a quarter of the loan-to-value ratio, instead of the current 10%, and will be applied by FINMA to the insurance sector “so as to prevent distortions of competition”.
“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 borrower’s own funds. In addition, the mortgage is now to be amortised to two-thirds of the loan-to-value ratio of the property within a maximum of 10 years (currently 15 years)” FINMA said in a statement.
Markus Staub, Head of Prudential Regulation, explains the focus on reducing the loan-to-value ratio and shortening of the amortisation period: “Both measures are comparatively straightforward in terms of implementation, capitalise on tried and tested instruments and are suitable for making a targeted and effective contribution to further stabilising the real estate and mortgage market.”
The tightened rules which will come into force on 1 January 2020 only apply to new borrowers while owner-occupied residential properties are not affected by the adjustments.
The Swiss Bankers Association (SBA) announced in March 2019 that it was considering an amendment to the self-regulation in the mortgage financing segment.
For this purpose, it established a working group tasked with making a swift and targeted contribution to ensuring market stability in the “residential investment property” segment.
Together with the State Secretariat for International Financial Matters (SIF), FINMA and the Swiss National Bank (SNB), the SBA conducted an in-depth analysis of market trends and in a constructive dialogue, identi-fied the best possible measures.
The proposal for the amendment of the self-regulation submitted by the SBA in June 2019 was recognised as the minimum regulatory standard by FINMA in a letter dated 26 August 2019.
The financial market watchdog has been drawing attention to the signs of overheating in 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, it said.
These measures therefore only have a limited impact on the general risk situation across the entire market. For this reason, FINMA demanded a change in regulation that would curb overall demand for particularly risky mortgage loans for investment properties. In light of this, FINMA welcomes the SBA’s measures in the area of mortgage lending for investment properties.
Private ownership of second properties not covered
The definition of investment property as set out in the SBA’s revised self-regulation does not expressly include the buy-to-let segment. These properties are generally apartments and single family houses owned by private individuals that are not occupied by the owners themselves, but are instead rented out.
This segment makes up around 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 amortisation 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.