Loan-to-value policy and housing finance: effects on constrained borrowers

BIS Working Papers No 673
November 2017

Paper produced as part of the BIS Consultative Council for the Americas (CCA) research project on "The impact of macroprudential policies: an empirical analysis using credit registry data" implemented by a Working Group of the CCA Consultative Group of Directors of Financial Stability (CGDFS).



This paper studies the impact on borrowers of loan-to-value (LTV) limits in Brazil, restricting the amount of credit that borrowers can take out. It considers two major housing finance segments. The first segment comprises housing loans directed mostly to middle-income households. The second segment targets low- and middle-income households. In particular, the study focuses on the subset of borrowers that are constrained by the policy. These borrowers would not comply with the LTV limit if allowed to do so. To do the analysis, the paper uses loan-level data on mortgages augmented with a detailed employment register.


Macroprudential policies related to housing finance represent a growing share of macroprudential tools. The objective of LTV limits for housing loans is to increase borrower resilience and to lower bank losses during downturns. However, the literature has not explored important transmission channels of LTV limits. Particularly, there is a lack of analysis at the loan level. This includes the effects of the policy on missed payment levels and on the choice of housing by families. This paper contributes to the literature by focusing on these changes on the behaviour of borrowers following the implementation of the LTV limit.


The results show that imposing LTV limits shifts several characteristics of the loan contract and influences borrowers´ behaviour. In both segments of housing finance, constrained borrowers end up meeting the new LTV limit. However, the impact on middle-income borrowers is greater.  In this segment, borrowers affected by the new regulation purchase more affordable houses. Moreover, these borrowers are less likely to be in arrears 12 months in the future. On the other hand, for borrowers of the second segment, there are no significant effects on housing choice or missed payments.



This paper explores the effects on constrained borrowers of an LTV limit implemented on September 2013 on two major segments of housing finance in Brazil. LTV (hard) limits and related policies entail identification challenges, since constrained individuals are no longer directly observed after policy implementation. In this paper, partially observed treatment status is overcome by the use of an adjusted difference-in-difference method, focusing on the average treatment effect on the treated borrowers (i.e. those that would violate the LTV limit if allowed to do so). We use comprehensive loan-level data on mortgages augmented with a detailed and granular employment register. In the most affected segment, constrained individuals must meet the new LTV limit. These treated borrowers purchase more affordable homes and are less likely to be in arrears 12 months in the future. In the least affected segment, constrained borrowers also end-up meeting the new LTV limit, but the impacts are smaller and we find no significant effects on borrower's housing choice or morose debt.

JEL classification: G21, G28

Keywords: LTV, loan-to-value ratio, mortgage, credit register, housing loans, macroprudential policy