Debt cap regulations in mortgage lending

Abstract

In this paper I study debt cap regulations in retail mortgage lending in Hungary introduced by the National Bank of Hungary. I believe the introduction of debt cap regulations was justified, but the toolkit applied should be reviewed. After studying international examples and reviewing the literature, I have concluded that LTV (loan-to-value) regulation correspond to European practice and researchers’ findings. While the introduction of LTI (loan-to-income) ratio should be considered to replace PTI (payment-to-income) ratio, as it is more stable in time and there is no incentive to switch between the increase of risk factors and the increase of the maximum amount regulated by law by PTI regulation.