First-time buyers are still entitled to 100%
While certain limits now apply to mortgages, households buying their first home — as a main residence — can still finance up to 100% of the property’s value.
With the economic consequences of the health crisis still tangible, but the property market in the Grand Duchy remaining very tight (with supply still falling short of demand), the publication in December 2020 of a new regulation by the Commission de Surveillance du Secteur Financier was seen by some as a warning. Encouraged by the government, the CSSF set out new “limits on the granting of loans relating to residential property located in Luxembourg”.
“Banks will have to limit mortgages”, some newspapers even ran as headlines at the time.
Yet there is a gap between the text and its interpretation. Read closely, the regulation was in fact quite nuanced: “A maximum limit of 80% is set for the ratio between the sum of all loans or loan tranches secured by the borrower in respect of a residential property at the time the loan is arranged and the value of the property at that same time [what is known as the “loan-to-value ratio”, or “LTV ratio”]. This limit therefore also applies to mortgages on properties intended for letting.” But this clarification followed immediately: “By way of derogation, for first-time buyers of a main residence, the maximum limit is raised to 100%.” Outside the case of first-time buyers, the limit for the purchase of a main residence is now set at 90%, though exemptions may be granted up to 100%. That is not the case, however, for private individuals investing in rental property.
Brokers had understood…
It could hardly be clearer: households wishing to become homeowners for the first time (where it concerns their main residence) are not really affected by this requirement. Something the Commission acknowledged in the press: “There is absolutely no intention of depriving young households of the opportunity to buy a main residence.” The Finance Minister, for his part, specified that the text’s real significance lay elsewhere: “Setting the new standards will make it possible to limit the emergence of excessive household debt, which remains a factor in the decline of the consumption and saving needed for robust economic growth…”
A return to reason, then. First-time buyers can rest easy. Provided the employment and therefore financial situation is sound, loans covering up to 100% of the property’s value remain negotiable. Specialist brokers have long understood this and are drawing on their contacts and their network among the banks to complete applications where, in fact, 100% of the price is financed by credit (at interest rates that, moreover, remain very low).
Looking closely at individual applications, it also turns out that the households concerned are already paying very high rents before becoming owners. As a result, a very similar amount goes towards repaying the loan. The balance of the household budget is therefore not at risk.
