On February 26 2015 the Central Bank of Kosovo approved the Regulation on Mortgage Lending, which establishes requirements and standards for mortgage loans. The regulation will enter into force on October 1 2015 and will apply to all credit-issuing financial institutions licensed by the Central Bank (ie, banks, non-bank financial institutions and microfinance institutions).

A 'mortgage loan' is defined as any loan secured by immovable property which allows the mortgage creditor to initiate foreclosure proceedings for the purpose of fulfilling the debtor's obligations under the mortgage loan.

The regulation classifies mortgage loans as either residential or commercial. Residential mortgage loans are sub-classified as:

• qualifying residential mortgage loans;
• non-qualifying residential mortgage loans;
• qualifying guarantor residential mortgage loans; or
• non-qualifying guarantor residential mortgage loans.

Financial institutions must classify mortgage loans according to these categories when issuing the loan.

The regulation stipulates provisions that all mortgage agreements and mortgage loan agreements used by financial institutions must contain, in addition to those required under the Law on Property and Other Real Rights (03/L-154) and the Regulation on Effective Interest Rates and Disclosure Requirements.

Residential mortgage loans

Definition
'Residential mortgage loan' refers to a loan secured by residential immovable property. 'Residential property' refers to immovable property in which at least 50% of the interior space is used for residential purposes by natural persons. Such immovable property may be a unit in a collective building (eg, condominium) or a separate building that may contain up to four separate residential units.

Requirements
The regulation provides that residential mortgage loans may be concluded only with natural persons and for the following purposes:

• to purchase immovable property for residential use;
• to refinance an existing mortgage on residential immovable property;
• to finance the value of residential immovable property;
• to finance renovation of residential immovable property; or
• to finance the construction of residential immovable property by a natural person.

The regulation stipulates that the borrower in a residential mortgage loan agreement must either own the immovable property used as collateral or use the mortgage proceeds to assume ownership, with the exception of guarantor residential mortgage loans. In such case, the guarantor must own the mortgaged property and the mortgage debtor must use the proceeds of the mortgage loan to assume ownership of the financed property.

When determining a borrower's credit capacity, financial institutions should abide by the maximum values accepted by the Central Bank with regard to:

• the ratio of the borrower's monthly housing costs to his or her monthly income; and
• the ratio of the borrower's monthly financial obligations to his or her monthly qualifying income (ie, documented income calculated on a monthly basis that can be used to pay living and housing expenses, as well as debt).

On assessing collateral and issuing the loan, the financial institution should determine the loan-to-value ratio for the proposed mortgage. This is determined by dividing the amount of the mortgage loan by either the official appraised value of the property or the purchase price, whichever is less.

The regulation provides that financial institutions cannot limit the full or partial repayment of residential mortgage loans. Partial early repayment may be made in one lump sum or equal instalments over a 12-month period. Financial institutions may charge the debtor an early repayment penalty fee as a percentage of the amount of the early repayment of principal. However, this penalty may not be charged after the fifth year of the loan or in case of full repayment of the loan due to the sale of the immoveable property.

Commercial mortgage loans

Definition
'Commercial mortgage loan' refers to a loan secured by immovable property entered into with a business organisation or secured by commercial property. 'Commercial property' refers to immovable property in which more than 50% of the interior floor area is used by business organisations or leased to others, regardless of purpose. Commercial property includes office buildings, industrial property, medical centres, hotels, shopping malls, retail stores, collective buildings, warehouses and garages.

Commercial mortgage loans include:

• agricultural mortgage loans;
• construction loans during the period of construction (even if the loan is for residential property); and
• mortgage loans for residential property that do not fall within the definition of a 'residential mortgage loan'.

Requirements
When issuing commercial mortgage loans, financial institutions should use sound and consistent policies to assess the borrower's credit capacity, in compliance with the financial institution's credit policies and Central Bank regulations.

Requirements for all mortgage loans

Financial institutions must establish policies regarding mortgage loans which incorporate the requirements set out in the regulation.

Further, in the case of mortgage loans worth more than €50,000, financial institutions must require the debtor to obtain and maintain property hazard insurance. The financial institution may establish an escrow account to collect and pay property insurance fees, as well as other fees and taxes (eg, property tax) required under the mortgage agreement.

The regulation sets out the schedule for sending delinquent notices to the debtor for overdue payments, reminding the debtor of the consequences of late payment. Depending on the length of delay, consequences may include default interest and foreclosure.

Foreclosure proceedings may commence at any time if the financial institution establishes that the debtor cannot make loan payments in the near future. In any case, foreclosure proceedings should commence within 181 days of a missed loan payment (unless arbitration or mediation is agreed). Before initiating foreclosure proceedings, the financial institution must demand from the debtor in writing payment in full, under the terms of the mortgage agreement and the acceleration clause of the mortgage loan agreement.

For further information on this topic please contact Delvina Nallbani at Boga & Associates by telephone (+355 4225 1050) or email (dnallbani@bogalaw.com). The Boga & Associates website can be accessed at www.bogalaw.com.

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