What is the lending limit?
In banking, the lending limit, also known as the lending rate, is understood to be a certain percentage of the lending value of loan collateral up to which credit institutions may grant a maximum of one loan. The lending value is therefore not limited by the loan amount, but by the low lending limit.
securities
Loan collateral was created in order to provide proceeds from the realisation of non-performing loans in the event of an event of realisation. This should be sufficient to cover the open loan amount demanded by the bank. For this reason, the exact value of a loan collateral must be determined when the collateral valuation is related to the collection of a loan collateral. This value is called the mortgage lending value and, according to the legal definition under Art. 4 Par. 1 No. 74 CRR (Capital Requirements Regulation), is the value of a property determined on the basis of a prudent assessment of its future marketability, taking into account its long-term and permanent characteristics, normal and local market conditions, current use and appropriate alternative uses.
It is therefore an internal bank value determined on the basis of available objective information. This value can be achieved without any time pressure when the property is sold and is sufficient to cover the non-performing loan. The CRRs deal very closely with real estate financing secured by mortgages. However, these basic statements can be applied to other loan collateral without any problems and analogously. The determination of the mortgage lending value is used exclusively to clarify whether the proceeds, which are still uncertain at the time of acceptance, of a certain loan collateral are sufficient to cover the required loan claims in the event of liquidation.
mortgage lending value
The mortgage lending value, the is based on the market value, does not yet take into account the individual realization risks as well as the risk of fluctuations in the value of a certain loan collateral or its liquidability, which can be more or less rapid. Value risks include individual economic risks of fluctuations in stock market prices and market prices, general risks of fluctuations in value, fluctuations in the creditworthiness of issuers of securities and other third party borrowers, and market liquidity. These risks are to be adequately countered with the lending limit. For this reason, a percentage discount is applied to the mortgage lending value to take account of these risks. Thus, the lending limit has a fixed relation to the actual mortgage lending value and thus indicates the highest possible part of the mortgage lending value that the loan can draw on. The lending limit and the mortgage lending value aim to determine the loan amount according to the value of the respective collateral object, taking into account the known risk factors. The lending limit is intended to indicate the proceeds which, with a high degree of probability, will not be undercut when the loan collateral is realised.
risks
The higher the value risks, the lower the lending limit and vice versa. If, for example, government bonds are borrowed, there are foreseeable no value risks, as a credit risk of the debtor Federal Republic of Germany (BRD) with the best rating is pretty much excluded, while a price risk caused by interest can only be countered by the realization when the bond matures. The result is a lending limit of 100% of the actual mortgage lending value. The highest value risks, on the other hand, are posed by volatile equities in a very narrow foreign currency market with a negative rating, for example, since, in addition to the high price risk there is also an independent currency risk. There is also an issuer risk. Due to these reasons, it may be that the lending limit is 0 % and thus a loan security is not an option.