TIRANA, May 30 /ATA/ The new regulation of the Bank of Albania will take effect starting from July 1, 2025, setting the framework for how the country’s 11 commercial banks will extend mortgage loans for the purchase of residential property.
Klodion Shehu, Director of the Financial Stability Department, said in a televised interview that the Bank of Albania’s decision to enforce the upper cap ratios on new mortgage lending compels second-tier financial institutions to adopt a more prudent risk management approach.
According to Klodion Shehu, while no immediate systemic risk is seen in the real estate market or bank exposures, potential cyclical risks justify the Bank of Albania’s prudential measures.
Klodion Shehu underscored the pivotal role of the real estate sector in underpinning economic growth and maintaining financial system stability. He cautioned against the risk of a feedback loop, whereby credit expansion amplifies property price inflation, which subsequently incentivizes further credit growth. Nonetheless, he affirmed that, at present, the Bank of Albania does not identify any immediate systemic risks related to the real estate market or banking sector exposures, highlighting that financial institutions maintain prudent risk management and that market conditions remain broadly favorable.
According to him, the new regulation sets the loan-to-value (LTV) cap ratios in Albanian lek currency at 85% for the first home and 80% for the second home, while for foreign currency loans, the caps are 75% for the first home and 70% for the second home.
The regulation establishes the debt service-to-income (DSTI) limits at 40% for primary residence loans and 35% for secondary residence loans denominated in Albanian lek. For foreign currency-denominated loans, the DSTI caps are set at 35% for the primary residence and 30% for the secondary residence, aiming to ensure borrower repayment capacity and mitigate credit risk exposure.
Shehu stated that “the enforcement of these caps will help reduce borrower default risk and mitigate potential bank losses associated with these loans, should the country face adverse developments in real estate prices, interest rates, or similar factors.” /j.p/sm/
