New framework concerning residential mortgage loans in Luxembourg

On 9 December 2019, the law dated 4 December 2019 on macro-prudential measures on residential mortgage loans in Luxembourg entered into force (the New Law). The New Law amends the Luxembourg law of 5 April 1993 on the financial sector, as amended, and the law of 1 April 2015 establishing a Systemic Risk Committee (the SRC) amending the Law of 23 December 1998 concerning the monetary status and the Banque centrale du Luxembourg (the BCL), as amended.

In line with recommendations from the International Monetary Fund and the European Systemic Risk Board, the New Law introduces macroprudential measures in order to address threats to the stability of the Luxembourg financial system caused by the combination of increasing residential real estate sector prices and household indebtedness.

For this purpose, the New Law grants new powers to the Luxembourg Financial Supervisory Authority (the CSSF), in collaboration with the BCL and upon instruction by the SRC, to impose limits for granting mortgage loans for the acquisition of residential property in the Grand Duchy of Luxembourg. The New Law applies to credit institutions, insurance companies and professionals carrying out lending operations.

In case of threats to the financial stability in the Grand Duchy of Luxembourg caused by developments in the real estate market, the CSSF may define a maximum limit for:

• the ratio between the aggregate sum of all mortgage loans of the borrower and the total market value of a given real estate property at the time of the establishment of the loan. This limit should be set between 75% and 100%;
• the ratio between the aggregate sum of all mortgage loans of the borrower and the borrower’s total available annual income at the time of the establishment of the loan. This limit should be set between 400% and 1200%;
• the ratio between the borrower’s total indebtedness and the borrower’s total available annual income at the time of the establishment of the loan. This limit should be set between 400% and 1200%;
• the ratio between the total annual loan charges and the total available annual income of the borrower at the time of the establishment of the loan. This limit should be set between 35% and 75%; and
• the initial maturity date of the loan. This limit should be set between 20 years and 35 years.

The CSSF may decide to apply these limitations alone or in combination and to all or part of the amount of new loans. The CSSF may only apply these limitations if it has received a recommendation from the SRC. Where actors of the insurance sector are concerned by any limitations the CSSF must have a preliminary discussion with the Commissariat aux Assurances.
Subject to the same conditions being met, the CSSF may request the national authorities of other EU Member States to recognise the limitations for granting mortgage loans for real estate property located in Luxembourg and to apply them to the entities under their supervision.

Under certain circumstances, the New Law also grants the BCL access to aggregate information available from State departments and public institutions required for research and analysis purposes in relation with the mission of the SRC.

The New Law grants new powers to the CSSF to mitigate macro-prudential risks stemming from the residential property sector. However, the introduction of these new limitations is made at the entire discretion of the CSSF.