Economists from the Bank of Latvia analyzed the incomes of mortgage loan recipients. Questions have arisen...
The portal of the Bank of Latvia, makroekonomika.lv, recently presented an analytical report by economists from the Bank of Latvia dedicated to "the credit burden on households." Based on the available databases of borrower incomes, analysts made interesting conclusions.
The official incomes of some borrowers are unlikely to match the loan amount and interest rate: for example, 2.3% of the volume of new housing loans were issued to borrowers whose net incomes, along with the incomes of co-borrowers and guarantors, do not exceed 500 euros per month. In the overall balance of housing loans in the banking sector, such loans account for almost twice as much — 4.3%. This increase in the share can be explained by several reasons, including that individuals receive incomes that are not included in the analyzed income data (for example, from employment in another European Union (EU) country, from activities under the micro-enterprise tax regime, or from certain benefits), or borrowers in subsequent years after taking on credit obligations may reduce the level of declared incomes (returning to the shadow economy). The majority of borrowers with unlikely low incomes are those who took out loans before the end of 2007.
The provided information from the State Revenue Service (SRS) contains no income data for 11.6% of all housing loan recipients in 2024, as well as for their co-borrowers and guarantors. Only 17.1% of them are individuals over 65 years old (48% of individuals in this age group are borrowers, while 52% are guarantors). Additionally, 0.4% of individuals have incomes... equal to zero!
"There is a lack of income data for some new housing loan recipients, or their incomes do not correspond to the loan amount and interest rate. Given the requirements established by credit risk management rules and the practice of banks assessing borrower incomes before taking out a housing loan, such a result is likely explained by deficiencies in income data. Among borrowers with unlikely low incomes, there may be individuals who submitted or updated their annual income declaration after sending data to the Bank of Latvia, or the incomes of these borrowers are from sources not fully reflected in the data provided to the Bank of Latvia, for example, they are obtained in another EU country or from activities under the micro-enterprise tax regime. To reduce this shortcoming, the Bank of Latvia proposed amendments to the cooperation agreement with the SRS to obtain data on late submitted or updated annual income declarations. For some housing loan recipients, incomes become unlikely low in subsequent years after receiving the housing loan. Data on the incomes of all active housing borrowers in the largest banks show that after receiving the loan, there is a significant increase in both the share of borrowers with incomes that do not correspond to the loan amount and interest rate (unlikely low incomes) and the share of borrowers without income data. This result can also be at least partially explained by data imperfections. However, given the increase in the share of significant borrowers with unlikely low incomes and borrowers without incomes in the current loan portfolio, one cannot exclude the possibility that borrowers in subsequent years after taking on credit obligations are employed in the shadow economy or begin illegal employment," stated economists from the Bank of Latvia.
All this, of course, is interesting and only confirms the assumption that a significant portion of Latvians either work illegally, finance their mortgage from past savings, or work abroad. But for creditors, the most important thing is that... debtors pay.
