As of June 2023, 66.9% of mortgages in Luxembourg have a debt-service to income (DSTI) ratio above 40%, data from the International Monetary Fund shows. This means that for two out of three households with a housing loan, their monthly mortgage payments are 40% or more of their net household income. This threshold is generally accepted as the point where families begin to find their debt servicing obligations difficult. Importantly, this figure only includes mortgage debt and does not account for other debts the household may have, further increasing the risk of default on mortgage payments.
Moreover, over half of mortgages with a DSTI above 40% have loan balances ranging from €50,000 to €200,000. Specifically, 28.4% fall within the €50,000 to €100,000 range, and another 27.2% are between €100,000 and €200,000. Additionally, the proportion of loans with balances over €200,000 decreased from 10% at the end of June 2022 to 7.3% in June 2023. This suggests that more affluent households, with higher disposable income or savings, have likely repaid lump sums, thereby reducing their monthly obligations and overall interest payments in response to higher interest rates.
In response to increasing interest rates since the second half of 2022, banks have their loan conditions to reduce the risk of defaults. This tightening is evident in the consistent decline of mortgages with a debt-to-income (DTI) ratio above 900%, falling from 60.6% in June 2022 to 35.3% in June 2023. This improvement can be attributed to two factors: an increase in net income through and stress tests that have screened out households on the margins of loan qualification as mortgage rates rose.
While the share of mortgages with a DTI above 900% has dropped to its lowest level since 2018, higher interest rates are putting households under financial stress, as the proportion of DSTI above 40% is at its highest since 2018. To minimise the risk of default, it is likely that fiscal policies will be implemented to ease pressure on the most vulnerable households. Additionally, banks may loan terms more favourably or allow forbearance.
The data was provided by the IMF on 18 June 2024 in response to a request from Delano.