Banks maintain high mortgage requirements despite falling rates | Financial markets

Spanish banks do not give respite to those who want to take out a mortgage. Companies are maintaining the high standards they used to qualify for a home loan, despite lower interest rates. This is reflected in the Bank Lending Survey published today by the European Central Bank (ECB), in which the regulator notes a revival in credit demand in the third quarter of the year. Mortgage lending criteria remain unchanged across Europe compared to the second quarter, although the rest of European countries had already applied looser requirements at the beginning of the year, Spanish banks continued to tighten conditions.

According to the report, on average, European banks applied 3% more reductions in mortgage terms compared to the previous quarter. But the data is driven by France (a further 22% of banks said they had lowered their criteria) as these institutions are locked in a commercial war to attract new customers, forcing them to offer better interest rates to customers. “Competition between banks, lower costs of funds and the health of enterprise balance sheets were the main factors in easing the criteria for issuing mortgage loans,” the document says.

Banking regulations to which organizations are subject require them to provide responsible lending. This means that banks must carry out due diligence to assess the customer’s financial capabilities to ensure that they will be able to accept the debt and repay it within the entire agreed period. During the two years that the ECB was on the path of raising rates to fight inflation, conditions were tougher, so this test was also tougher as customers faced a situation of higher prices and higher financial costs due to debt that they had. incurred. That is why banks have tightened their requirements.

With the change in monetary policy that the central bank made last July (it had already made two rate cuts to keep the deposit rate at 3.5% from 4%), conditions are expected to improve. In this sense, it is expected that by the end of the year the interest rates offered by banks when applying for a mortgage will decrease. “Eurozone banks expect a strong easing of home loan terms (12%) in the fourth quarter, which, if materialised, would be one of the largest easings ever,” the ECB said.

In any case, even despite the high requirements, Spanish banks have noticed an increase in demand for mortgages. After several quarters during which loan applications continued to decline, it was precisely because of high demand and high loan prices that businesses increased new production. In the case of Spain, there are 10% more banks than in the previous quarter, and the European average is 39%. “Lower interest rates and improving property market prospects were the main factors that had a positive impact on demand for home loans,” the report said.

Over the past two years, as interest rates continued to rise, Spanish and Italian banks in particular have experienced an influx of income, which in many cases has led to record profits. But while the impact of rates will not increase, they will need to increase their lending to support that income generation.

As for consumer lending, banks continued to tighten conditions. Despite the easing of monetary policy, enterprises continued to maintain low risk appetite. On average, 8% more European banks said they had tightened requirements, and 17% more Spanish banks. “Increasing risk perceptions have been a major driver of tightening consumer lending standards. “This was mainly related to the economic outlook and solvency of borrowers and is in line with the attention paid by banks to increasing credit risk,” the ECB explained in the document.