The lending regulation

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. From 1 January 2023 the regulation will also cover loans with other collateral than real estate, such as car loans. Lenders must adapt their credit standards for loans with other collateral by 1 July 2023.

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 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. For loans with other collateral than real estate, the quota is 10 percent.

Requirements in the lending regulation

	Mortgages	Consumer loans	Other loans
Maximum loan-to-value (LTV) ratio, installment loans	85 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
Interest rate stress test of debt-servicing-ability	Whichever is highest of: -          a 3 percentage points increase from the current level or -          7 percent
Flexibility quota -        in Oslo	10 percent 8 percent	5 percent	10 percent

Scope

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

Debt-serving ability and debt 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, 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.

When assessing a customer’s debt-service ability lenders must ensure that the customer have sufficient funds to cover regular expenses after an interest rate increase of 3 percentage points. At a minimum the customer must be able to be to cover regular expenses if the interest rate was 7 percent.

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.

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 instalment 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:

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:

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 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, or a lower LTV ratio than the existing loan,
• 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 and loans with other collateral than real estate, 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.

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.