As far as applications for a loan product (including mortgage loans) are concerned, each bank has its own (internal) methodology, while being limited by the rules and limitations set out by the National Bank of Slovakia (NBS). In case of mortgage loans, banks examine three main areas. These are: the creditworthness of the client, the property, and the purpose of the loan. Based on specific parameters, the bank assesses whether it can offer a mortgage loan to the client, and if so, in what amount and under what conditions.(click to open each criteria)
1. Creditworthness of the client
In most cases, the minimum age is 18 years of age. However, when dealing with particularly young applicants, banks are either not willing to provide high loans, or they require higher credit protection or adding co-debtors.
In terms of the maximum age, the bank’s prerequisite is that the client is to repay the debt before reaching 65 years of age. Exceptionally, it might be 70 years of age, particularly in case of two applicants.
Type of income – generally, banks distinguish between primary income (employment or entrepreneurship) and secondary/supplementary income, which cannot be the only source of income (usually income from property rental, pension, maternity benefits, or parental benefits).
Sector – due to the COVID-19 outbreak, banks are now examining the sector of activity of the client (in which they conduct business/are employed) more closely. If the loan applicant operates in one of the sectors which have been impacted by the crisis and the confinement measures most significantly (hospitality, culture, tourism etc.), accessing loan financing will be extremely difficult, and some banks might reject their application outright.
Duration of employment/entrepreneurship – the minimum duration of employment is 6 months, exceptionally 3 months (e. g. upon returning to work after maternity leave or in case of so-called continuous employment relationship). In case of entrepreneurs, banks usually require a minimum of one year of history, although it is not unusual for them to require the mortgage applicant to have concluded two whole annual periods. Banks tend to be stricter regarding the minimum duration of employment required in case of foreigners (e. g. 12 months as opposed to 6 months for an applicant who is a Slovak national). You can find more information about mortgage for foreigners in this article.
Type of employment relationship – the ideal applicant from the point of view of the bank is an employee in permanent employment, i. e. employed for an indefinite period. As far as income from a fixed-term employment is concerned, banks may accept it in certain sectors where it is common (education, health system), while having internal rules in place as to how long the employment is to continue from the date of the application, or they may want to see evidence of the applicant’s fixed-term contract having been prolonged at least once.
Banks do not accept income from work performance agreements or contracts for work.
Banks prefer clients with higher education qualifications, as in case of loss of job, they are expected to find a new one in a short time. Also, income of a client with higher education qualifications tends to be higher than income of a client without a secondary school-leaving exam. However, it is not the case in certain regions anymore, as a skilled interior construction worker or a plumber in Bratislava is often able to earn higher income than a philosophy or a law school graduate.
If the loan relationship involves multiple debtors, the bank faces a lower risk of not having its money repaid. That is why the bank examines whether the debtor is single, married or divorced. In most cases, spouses have matrimonial property, which is why they automatically act in loan relationships as a couple and commonly contribute to loan repayments. If a spouse struggles with repayments, the bank will claim not only one half of the outstanding amount from the other spouse, but all of it.
When dealing with loan product applications, every bank examines both the existing and the past loan commitments of the client.
The bank verifies the client’s history in the so-called loan register, examining the client’s current situation as well as their history of up to five years ago. Every bank thus gets information about the existing and the past loans of the client and whether they were punctual with their repayments or not.
Apart from payment discipline, in accordance with the limitations set out by the National Bank of Slovakia, every bank is obliged to verify DTI and DSTI of each client applying for a loan.
DTI ratio (debt to income) refers to the requirement that the overall loan burden (the existing loans as well as the new loan the client is applying for) cannot exceed 8 times the amount of the client’s annual income.
For instance, if the client’s net income is EUR 1,000 and they are already repaying a consumer loan with the debt amount (unpaid principal amount) of EUR 5,000, the maximum amount the bank can lend is EUR 91,000. (EUR 1,000 x 12 x 8 – EUR 5,000 = EUR 91,000).
DSTI ratio (debt service to income) refers to the requirement that each loan applicant must have 40 % of their income left (after deducting the instalment amount and the amount of the minimum living wage) as a so-called financial cushion. The instalment amount of a new loan cannot exceed 60 % of the calculated amount.
For a client, whose monthly income amounts to EUR 1,000 and who is already repaying a loan with monthly instalments amounting to EUR 122, the following calculation applies: EUR 1,000 – EUR 215 (minimum living wage) – EUR 122 (existing instalment) = EUR 664. The threshold for the instalment of a new loan is 60 % of the amount calculated in this manner, i. e. EUR 398.
A mortgage loan can be secured against different types of properties. These are usually: land, an apartment, a house, non-residential premises – a suite, a house under construction, exceptionally also an apartment under construction. It is always a domestic property, i. e. a property located on the territory of the Slovak Republic.
Value of the property impacts the maximum loan amount the bank can provide to the client as well as the interest amount (the price of the funds) at which it is willing to do it. Each bank examines LTV (loan to value) – the basic parameter relating to the property. This parameter refers to the ratio of the loan amount to the value of the property.
The LTV ratio is used by the National Bank of Slovakia to regulate the indebtedness of the population. In the past, banks were allowed to provide mortgages with LTV of up to 100 %. Nowadays, mortgage lending with LTV exceeding 90 % is prohibited, the NBS also having limited mortgage lending in the range of 80% – 90% LTV to 20 % of the total number of newly provided loans. The maximum amount of LTV is also influenced by the type of property. For example, in case of apartments in cities, banks can provide lending amounting to 90 %, whereas in case of land it usually amounts to no more than 50 – 60 %.
Regarding the interest amount, as a rule, the higher the LTV, the higher the interest. Some banks offer the best rates at up to 50% LTV and in most banks an additional charge applies from 80% LTV.
The location of the property impacts the maximum amount of LTV as well as the maximum loan amount. There are banks which focus on the “urban client” – if the property is located in a district or regional capital city, they are willing to lend a larger amount than if it was in the countryside. However, there are also banks on the market which focus on maintaining a strong presence in regions as well.
Although the expert appraisals take the factor of location differentiation into consideration, if you own a property such as a detached house built for EUR 200,000, from the point of view of the bank its value (and thus also the maximum loan amount) differs based on whether the property is in Bratislava or in a village in Central Slovakia. It is due to the fact that if you failed to repay your mortgage, the property in Bratislava could be sold more easily due to the higher demand.
If a property is to be subject to the security right, it is important that it is not linked to any burden the bank does not accept. It is not possible to have a property secured to the benefit of one bank and to apply for another mortgage with another bank. Exceptions apply to the National Housing Development Fund and savings and loan associations. The right of survivorship is also unacceptable for all banks, as it complicates the potential exercise of the security right.
In case of detached houses, it is also important for the access road to the property to be legally settled (similarly in relation to the potential exercise of the security right) and for all the relevant properties to be recorded in the cadastral register (e. g. garage, extension etc.).
3. Purpose of the loan
The client submits a relevant proof than they are about to acquire the property, or they have acquired it (some banks allow so-called reverse refund of the property acquisition, mostly within one year). It usually involves purchase, settlement of shared ownership or pay-out of inheritance shares.
As opposed to past rules, it is possible for the property being purchased to be subject to the security right, with the pledge contract being signed by the current owner.
This purpose enables the debtor to use the money to build a residential property, i. e. a detached house (in case of a recreational property, clients usually opt for home equity loans).
When it comes to purpose, there are two major differences between banks: how the mortgage is drawn down (number of tranches sent to the client by the bank and their amount) and how the clients submit evidence of the individual tranches/the entire loan amount (photographs, declaration on honour, a new expert appraisal etc.).
This purpose might involve either so-called net refinancing or refinancing with an increase.
Net refinancing means replacing one mortgage by another with a maximum increase of 5 % and EUR 2,000. In this case, the bank takes into consideration particularly the client’s payment history and does not put greater focus on income (which does not mean that the client does not need to have an income). Getting a so-called refinancing mortgage is thus significantly easier than getting a regular mortgage.
Refinancing with an increase means that the client repays the original mortgage and borrows extra money from the bank at the same time (limited by LTV and the client’s creditworthiness). In this case, the bank examines the client’s income in the usual manner while asking about the client’s intentions for the additional funds. Some banks can increase the mortgage without statement of the purpose, while other banks require the client to sign a declaration on honour that they will spend the money on property-related purposes.
Consolidation means combining a mortgage and one or more loans into a new mortgage. Each bank has their own internally established criteria governing the types and the number of loans which may be combined. In such an event, the bank generally verifies the client’s income. Most commonly, consolidation involves a mortgage and a consumer loan or a loan from a savings and loan association.
When processing a home equity loan, the bank does not examine how the client spends the money. Home equity loans secured against a property are not offered by every bank. Some banks offer home equity loans with the loan term reduced to 20 years, while it is also common for home equity loans to involve a higher interest rate.
A mortgage is a relatively complex product. Moreover, the conditions set out by banks change over time based on both developments on the market and the regulations of the National Bank of Slovakia. There are many banks providing different offers on mortgage market, so it’s a good idea to talk to your financial advisor and let him cover the whole process for you.
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