Inflation impairs Hungarians’ borrowing capacity and creditworthiness in many ways: 1. it reduces the portion of income remaining for loan repayment, 2. it eats away at the self-reliance required for borrowing, 3. it makes banks more cautious and stricter in determining loan terms, 4. it increases repayment installments through interest rate increases, which with a fixed income-proportioned repayment installment, it means a smaller loan amount or a longer required term. We now present the fourth phenomenon: even though nominal wages are increasing, the loan amount that can be borrowed is much smaller now than before the central bank interest rate hikes.
For our calculation, it is MNB’s debt brake rules we used, since since 2015 these are the limits that determine that
- compared to our net income, the maximum amount of monthly installments we can undertake (JTM indicator) also taking into account the income of the co-debtor, and
- what loan amount can be obtained for the sales value of the collateral property (HFM indicator).
Banks can apply stricter, not looser than these rules, including a in PM decree based on regulated loan collateral value.
IN THE CASE OF MORTGAGE LOANS WITH VARIABLE INTEREST RATES, WE CAN UNDERTAKE MORTGAGE LOANS UP TO 25% OF NET INCOME, UP TO 35% WITH AN INTEREST PERIOD OF 5 YEARS, WITH AN INTEREST PERIOD OF AT LEAST 10 YEARS OR UP TO 50% WITH A FIXED INTEREST RATE.
Unless our monthly income is at least HUF 500 thousand net, because then this limit is higher:
In the calculation, the income of the co-debtors counts together, for the sake of simplicity, we now looked at the possibilities of a single borrower in the case that he has an average or median income. According to the latest KSH data from January
- the average net monthly salary is 351,000,
- and the median (i.e. at which half of the earners earn worse and half earn better) is HUF 281,000.
The average typically exceeded the median by roughly a quarter in recent years.
From the debt brake rules and income statistics, it is easy to calculate the maximum repayment installment that a borrower with an average or a median income can undertake when taking out a mortgage loan.
WITH AN INTEREST PERIOD OF AT LEAST 10 YEARS OR A FIXED INTEREST PERIOD, THIS AMOUNT IS HIGHEST: HUF 176,000 OR 140,000.
Two years ago, before the central bank interest rate hikes, it was HUF 142 and HUF 110,000 respectively, which means that the situation has clearly improved from an income point of view, and the creditworthiness of those earning the average and median has increased.
However, in the meantime, the interest rate environment that determines the installments has deteriorated, specifically due to the appearance of galloping inflation and the tightening of the MNB’s monetary policy, in the April offers, housing loans with a 5-year interest period are at 9.9%, 10-year loans at 8.9%, and those with a fixed interest rate throughout They ran with an average interest rate of 9.3%. The good news is that the situation has improved somewhat since January, as home loan interest rates peaked at that time.
From all this, it is already possible to calculate how much mortgage loan we can take out with the most common 20-year term and the most popular 10-year interest period.
THE MAXIMUM AMOUNT OF LOAN FOR AVERAGE NET INCOME DECREASED FROM HUF 24.0 MILLION TO HUF 19.7 MILLION, AND FOR MEDIAN NET INCOME FROM HUF 18.6 MILLION TO HUF 15.7 MILLION in two years. THIS MEANS A REDUCTION OF 18 AND 15%.
Due to the increase in interest rates and the expected repayment installments, those borrowers who take out mortgage loans with variable interest rates or 5-year interest periods will run into the debt brake limits even more easily, for these the reduction is 24-27%. (In the above, we conservatively did not take into account the nominal increase in earnings that may have occurred since January.)
Of course, those whose income does not increase or even decreases can be in the worst situation. Based on the income of a debtor (or co-debtors) with an unchanged net income of HUF 400,000, we show how the loan amount that can be borrowed has decreased by 30-42 percent in the last two years.
The fact that the average loan amount of home loans was last as low as at the beginning of this year in 2019 can probably also be explained by the phenomenon described above.
And how can you defend against this? It is among a small number of adaptations
- the involvement of the co-debtor, which is “automatic” in the case of a mortgage loan in addition to a spouse, or
- commitment to a longer term, as this way the lower installment can still fit within the limit dictated by the debt brake rule (more precisely, the JTM indicator).
The former is not a suitable path for everyone, and in the case of the latter, unfortunately, taking on a longer term is not a magic bullet either: it does not proportionally increase the loan amount that can be borrowed. Assuming a 30-year term instead of 20, for example, the maximum loan amount that can be taken out does not increase by one and a half times, but only by 10-12%, as the examples in the diagram below demonstrate.
Lending in 2023
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