Stricter terms for home loans have been introduced across the board as a result of a recent Central Bank directive aimed to establish “minimum standards and create a level playing field” for banks.

Though the measure targets both first-time buyers and those seeking to acquire a second property for real estate, tougher conditions apply for the latter.

Sources in the banking sector told Times of Malta that this move could be a sign that the regulators are worried about the increasing exposure to a particular sector, in this case the construction industry, as this could threaten financial stability in the case of an economic downturn. 

They added that the introduction of stricter terms regulating the minimum deposit to be eligible to apply for a home and maximum monthly payment with respect to the applicant’s income could have two major effects. While housing may become less affordable for some buyers, in the longer term this may result in property prices going down, which in turn would negatively affect sellers.

However, a Central Bank of Malta spokeswoman told Times of Malta that the objective was “a preventive one” and not prompted by “expectations of unfavourable economic developments or potential downturns in the real estate markets”.

She also pointed out that the directive, introduced last March, sought to consolidate banking practices to achieve minimum binding standards and a level playing field.

Yet, according to the Central Bank, the move was not triggered by concerns that voluntary practices in place before were not sufficiently prudent. 

Strengthen resilience of both borrowers and lenders

The directive differentiates between first-time buyers and those seeking to acquire their second property or to rent it out (residential real estate).

In the case of first-time buyers these also include borrowers who have already owned a primary residence which has either been sold or on which a promise-of-sale agreement has already been signed, and cases whereby there are pending proceedings before the Civil Court (Family Section) which hinder the sale of the primary residence.

The Central Bank said that the objective of this measure was to strengthen the resilience of both borrowers and lenders against potential build-up of vulnerabilities which could result in financial losses for both, in case of unfavourable economic developments or downturn in the real estate markets.

The Central Bank stands ready to act when market conditions require measures to address changing circumstances, the spokeswoman said.

What are the new terms?

First-time buyers

Borrowers need to have at least 10% of the sum to be loaned to be eligible.

The value of the monthly instalment cannot exceed 40% of the applicant’s monthly income.

The loan has to be paid within 40 years or upon reaching retirement age, whichever comes first.

Borrowers purchasing a property for the value of up to €175,000 are not subject to the restrictions of this directive. 

10% speed limit – this allows banks to have some leeway on the minimum deposit required whereby it may request a lower amount in 10 out of every 100 loans issued.

Residential Real Estate

Borrowers need to have at least 15% of the sum to be loaned and by the second year they must pay 25% of it.

Monthly instalment cannot exceed 40% of applicant’s monthly income.

Loan has to be repaid in 25 years or at retirement whichever comes first.

20% speed limit – banks can request a lower deposit in 20 out of every 100 loans issued.