The lending regulation 1 January 2021 to 31 December 2022

To mitigate the build-up of debt in vulnerable households, the Norwegian Ministry of Finance have set requirements for banks and other financial institutions’ credit standards. Residential mortgage loans have been subject to a regulation since 2015, and a consumer credit regulation was adopted in 2019.

Background

In June 2015, the Ministry of Finance adopted a regulation with requirements for new residential mortgage loans, based on guidelines from the Financial Supervisory Authority of Norway (Finanstilsynet) which had been in effect since 2011. The evolution of the requirements over time are shown in a table at the end of this article. Since 2015, the Ministry of Finance has extended and amended the regulation on three occasions. In February 2019, the Ministry adopted a similar regulation with requirements for consumer loans. In December 2020, the Ministry of Finance consolidated the requirements in a new regulation covering both residential mortgage and consumer loans.

The current regulation came into effect on 1 January 2021 and will be in force until 31 December 2024. The regulation will be evaluated in 2022.

The regulation imposes restrictions on banks’ lending practices and includes requirements on:

• The customer’s debt-serving ability
• The customer’s debt-to-income (DTI) ratio
• Mortgage size in relation to property value (loan-to-value ratio, LTV ratio)
• Principal payments for all consumer loans and mortgages with a high LTV ratio.

To ensure that banks can make customer-specific assessments, a certain share of banks’ loans can exceed the regulation requirements. For mortgages, this flexibility quota is set to 8 percent of the lending volume each quarter in Oslo and 10 percent outside of Oslo. For consumer loans, the flexibility quota is 5 percent nationwide.

Requirements in the lending regulation

	Mortgages	Consumer loans
Maximum loan-to-value (LTV) ratio, installment loans -        secondary dwellings in Oslo	85 percent 60 percent	-
Maximum LTV ratio, home equity credit lines	60 percent	-
Required principal payments	Loans with LTV ratio above 60 percent	All loans
Maximum debt-to-income ratio	500 percent	500 percent
Stress test of debt-servicing-ability in the event of an interest rate increase	5 percentage points	5 percentage points
Flexibility quota -        in Oslo	10 percent 8 percent	5 percent

Scope

The regulation applies to banks and other financial institutions’ lending practices for mortgages and consumer loans. It also regulates foreign financial institutions operating in Norway.

The mortgage requirements apply for loans to individuals and sole proprietorships. The regulation’s loan-to-value (LTV) caps for mortgages also apply for loans to businesses. The requirements for unsecured loans apply for loans to consumers.

Debt-serving ability and debt in relation to income

Section 5 of the regulation requires lenders to assess the debt-servicing ability of their customers. For credit lines, e.g., credit cards, the lenders must base their assessment on the full utilization of credit limits. In their assessment, the lender must consider the customer’s income and all relevant expenses.

Lenders must make allowance for an interest rate increase of 5 percentage points when assessing debt-servicing ability. If the customer does not have sufficient funds to cover regular expenses after such an interest rate increase, the loan can only be granted within the lender’s flexibility quota.

Section 6 of the regulation limits how much total debt a customer can have in relation to their gross annual income (debt-to-income ratio):

The regulation caps the debt-to-income (DTI) ratio at 500 percent, meaning a customer’s total debt cannot exceed five times their income.

The regulation allows banks to consider funds deposited in the customer’s BSU account when determining the DTI and the LTV ratios. BSU is a form of saving for people under the age of 34 that offers favorable conditions if the savings are used on housing or property.

The amount deposited on the customer’s BSU account can be subtracted from the total debt in the calculation of DTI:

When calculating the DTI ratio, lenders are obliged to use personal income as defined for tax purposes. The regulation allows lenders to consider tax-free income in the calculation, provided that the income is stable over time and can be documented. Secure and documented rental income can also be included in the calculation.

Caps on the loan-to-value ratio

Section 7 of the regulation limits how large a residential mortgage loan can be relative to the property value (LTV ratio). The maximum LTV ratio for installment loans and home equity credit lines is 85 and 60 percent, respectively. All loans with the property as collateral must be included when calculating the LTV ratio:

For loans with a secondary dwelling in Oslo as collateral, the LTV ratio cannot exceed 60 percent. A secondary dwelling is defined as any dwelling with a different address than the owner’s registered address in the National Population Register.

Section 8 of the regulation allows lenders to consider additional collateral when determining the LTV ratio, such as collateral in other real estate and the use of a guarantor. The value of the additional collateral is added to the property value. As mentioned above, banks can also subtract savings in the customer’s BSU account from the loan amount in their calculation:

Principal payments

Section 9 of the regulation obliges lenders to require principal payments for mortgages with an LTV ratio exceeding 60 percent. Lenders must also require monthly principal payments on all consumer loans, as stipulated by section 13. The monthly payment must constitute an amount which leads to the consumer loan being paid in full within five years. For credit lines (e.g., credit cards) the minimum payment is determined every month based on the amount of credit used. The lending regulation permits instalment and interest deferral for existing loans to customers whose ability to pay has been temporarily impaired.

Refinancing

The lending regulation does not prevent the refinancing of an existing mortgage or consumer loan in the same bank, or moving the loan between banks. For mortgages it is required that the new loan:

• does not exceed the size of the existing loan,
• has the same property as collateral,
• has a duration which does not exceed the remaining duration of the existing loan, and
• has the same or stricter requirements for principal payments.

For consumer loans the requirements are that the refinanced loan:

• does not exceed the size of the existing loan or loans, and
• does not increase the sum of interest rate payments, fees, and other costs that the customer must pay.

Restructuring

Section 12 of the regulation allows lenders to deviate from the requirements regarding DTI ratio and interest rate stress testing when they grant loans where the purpose is to restructure the customers’ debt. To use the restructuring provision, it is required that the new loan:

• has housing as collateral,
• the customer’s total debt does not increase, and
• the customer is unable to service their total debt without the restructuring.

Exceptions

The regulation does not cover equity release mortgages with an LTV ratio below 85 percent. Equity release mortgages are loans with housing as collateral where the loan becomes due and payable when the borrower dies or sells the property. “Seniorlån” and “Litt Extra” are examples of equity release mortgages that are offered in Norway.

Moreover, the lending regulation does not cover credit lines in the form of credit cards where the customer’s total credit limits cannot exceed 25 000 kroner, or when financial institutions offer unsecured credit that does not incur any interest expenses or other costs for the customer. 

The evolution of requirements for residential mortgage loans

	Guidelines from Finanstilsynet		Regulation
	03.03.2010–30.11.2011	01.12.2011–30.06.2015	01.07.2015–31.12.2016	01.01.2017–31.12.2024
Maximum loan-to-value (LTV) ratio, installment loans	90 pct.	85 pct.	85 pct.	85 pct.
Maximum LTV ratio, home equity credit lines	75 pct.	70 pct.	70 pct.	60 pct.
Maximum LTV ratio, installment deferral	Unspecified	70 pct.	70 pct.	60 pct.
Maximum debt-to-income ratio	300 pct.	-	-	500 pct.
Stress test of debt-servicing-ability in the event of an interest rate increase	Unspecified	5 pp.	5 pp.	5 pp.
Maximum share of loans that can violate the regulation’s requirements each quarter	-	-	10 pct.	10 pct. (8 pct. in Oslo)
Maximum LTV ratio, secondary dwellings in Oslo	-	-	-	60 pct.