Central Bank report observes increase in borrowers taking on larger loans compared to income

28th August 2019

In 2017, 81.3% of households in Malta owned their own property, significantly surpassing the euro area average of 66.1%, according to the report.

A growing number of borrowers are taking on larger loans compared with their income, leading to higher loan repayments., a Central Bank of Malta report has shown.

This could possible indicate groups who are more vulnerable and less secure in the case of an economic downturn.

The Financial Stability Report prepared by the Central Bank assesses developments within the domestic financial system in 2018. A special section was dedicated to banks’ exposure to the real estate market, all the more pertinent when considering the sector’s growth as well as signs of an international economic downturn.

In the special section, it was found that while house prices have indeed gone up recently, monthly average repayments, when compared with the average wage have been far more contained, and are in fact below the levels reported in 2006-2007, at a time when housing prices grew exponentially.

Core domestic banks’ exposure to the real estate market has changed significantly throughout the years, with banks moving away from issuing loans to construction and real estate in favour of focusing on mortgages. In this way, lending smaller amounts to larger numbers of people instead of lending large amounts to a few players in the construction and real estate sector serves to spread the risk and mitigate any losses.

The number of mortgages issued grew by 8.8 per cent in 2018, however despite this, growth is still significantly lower than the double-digit growth rates recorded in the pre-2008 boom period, and it was still proportionate to nominal GDP growth.

The report highlights the average loan-to-income rates by borrowers, noting that almost half of loans are concentrated within three to five times gross income. It did note that the share of loans which are five to six times gross income increased in 2018. This translates into higher loan repayments while those in this bracket are likely to be more vulnerable in the event of economic downturn.

Read the full report here.

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