Unlocking Doors to Better Homes: Smarter Borrower Limits for Housing Upgrades Across Europe

Upgrading housing is essential to meeting the EU’s climate goals and providing better homes for Europeans. Achieving this depends importantly on households’ access to bank credit for renovations and new energy-efficient homes. Borrower-Based Measures (BBMs) protect financial stability but can unintentionally restrict loans for housing upgrades, particularly for low-income households. Drawing on experiences from Slovakia, Latvia, and Hungary, this blog explores how well-calibrated BBM easings, paired with complementary policies, can scale up investment in housing upgrades without undermining banking stability.

The Key to Better Homes: Bank Funding and Borrower Limits

Upgrading the energy efficiency of Europe’s homes is a cornerstone of the European Union’s strategy to achieve climate neutrality. Buildings account for about a third of the EU’s energy-related greenhouse gas emissions, making them one of the largest contributors to climate change. Yet more than 75% of the current building stock remains energy inefficient. Beyond constructing new energy-efficient homes, the EU must urgently accelerate the renovation of existing ones, as roughly 90% of today’s buildings are expected to still be in use by 2050 and renovation rates are far short of the targets set in the European Commission’s Renovation Wave strategy. Housing upgrades also deliver important social co-benefits: nearly 20% of the European population live in dwellings that are not comfortably warm during winter, half of them for financial reasons. This share rises to over 30% among those at risk of poverty. Moreover, about 15% of people in the EU live in overcrowded households.

The European Commission estimates that an additional EUR 275 billion in renovation investments are needed yearly to meet the 2030 emission reduction target. Homeowners are at the centre of this challenge: nearly 70% of people in the EU own their homes and are therefore responsible for undertaking renovation work. Yet ownership does not necessarily mean financial capacity. Many households lack the resources to fund major energy‑efficiency upgrades or purchase a newly built home. Across the EU, about one-third of homeowners are willing to renovate but do not have the necessary funds, a share that rises sharply among low-income households. In Germany, for example, nearly 70% of low-income homeowners cite financial constraints as the main barrier to energy upgrades, compared with 40% of homeowners on average. Access to bank loans is a critical enabler for upgrading housing for these households. However, this access is not always guaranteed, especially for low-income families, who often present higher credit risk and are thus more likely to be excluded from bank funding.

Whether a household can secure the loan it needs to upgrade its home often depends on borrower-based measures (BBMs) such as loan-to-value (LTV), debt-to-income (DTI), and debt-service-to-income (DSTI) limits. These are the main regulatory tools that shape households’ borrowing capacity. Financial authorities apply BBMs to safeguard financial stability – by curbing excessive credit growth and leverage in the economy – and to protect borrowers from over-indebtedness by ensuring they do not take on more debt than they can afford. These measures are in place across all EU member states and have generally proven effective in strengthening bank resilience and preventing unsustainable credit booms worldwide. Yet, BBMs can also unintentionally restrict access to finance for housing upgrades, particularly for lower-income or already-indebted households willing to invest but constrained by these limits. This trade-off between financial stability and energy objectives raises a critical question: can BBMs be adapted to enable more housing upgrades without undermining financial stability?

Opening the Door: Early Lessons from BBM Easing Initiatives

In carefully defined cases, the answer is yes. Easing BBMs for loans dedicated to housing upgrades can be justified when such investments generate energy savings that strengthen a household’s repayment capacity, when renovations enhance the property’s market value, or when projects are potentially eligible for public subsidies once terminated. Empirical evidence shows that energy-efficient homes typically have lower operating costs and more stable—or even rising—market values. From a credit perspective, this combination improves borrowers’ solvency and the quality of their collateral, thereby reducing credit risk for banks. When these improvements are significant and verifiable, they offer a strong rationale for easing BBMs on housing upgrade loans without jeopardising financial stability. This “risk-neutral easing” approach means relaxing regulatory limits only when the underlying risks remain unchanged—or may even decline.

Several European national supervisors have already taken steps in this direction. In a forthcoming paper, we analyzed three recent BBM easings implemented by the central banks of Slovakia, Latvia and Hungary (Národná Banka Slovenska, Latvijas Banka and Magyar Nemzeti Bank). In Slovakia, the central bank raised DSTI thresholds and extended loan maturities for renovation loans co-financed through the EU Recovery and Resilience Facility. In Latvia, DSTI and DTI limits were eased to account for energy-cost savings and incentivise a shift toward more energy-efficient housing. In Hungary, the authorities increased DSTI and LTV limits for green loans. All three initiatives combined targeted BBM easings with strict eligibility criteria tied to measurable energy efficiency improvements and were carefully calibrated to remain risk-neutral for the banking sector. These measures were not blanket relaxations, but precisely targeted adjustments designed to support climate-aligned lending without compromising financial stability.

The initial outcomes from these measures offer a nuanced picture. Banks in Slovakia, Latvia, and Hungary have not reported – nor do they expect – any significant change in their loan portfolio risk because of the BBM easings. Probabilities of default and losses given default have remained and are expected to remain stable, confirming the risk-neutral nature of these measures. At the same time, the uptake of housing upgrade loans facilitated by these adjustments has so far been modest. For now, these bank offerings continue to occupy a niche segment, and only a few banks have observed a noticeable increase in demand.

While BBM easings can help unlock access to credit for some households, results so far indicate that they alone cannot spark a large-scale wave of green renovations. This may reflect both the narrow pool of households that currently benefit from these measures and the lack of further incentives for more households to use them.

Opening the Door Wider: Increasing Uptake of BBM Easings

Two main obstacles explain the limited impact of BBM easings on the volume of housing upgrade loans. First, only a narrow subset of households—those already close to the original BBM limits and willing to invest—stand to benefit from them. Even within this group, many might remain reluctant to increase their debt burden as they are already near their borrowing capacity. Second, BBM easings do not create financial incentives for households to borrow or for banks to actively promote these loans. For households, the measures only expand borrowing capacity; they do not lower the cost of renovation projects. Achieving that requires complementary tools such as subsidies or interest rate advantages. For banks, meanwhile, the administrative effort involved in verifying eligibility and processing such loans can outweigh the benefits, particularly when loan volumes remain small. Without additional policies to address these constraints, BBM easings will remain a useful but insufficient lever for scaling up housing upgrade finance.

Policymakers would likely need to combine BBM easings with broader support measures to unlock their full potential. In particular, fiscal tools such as public subsidies, tax incentives, or guarantees can strengthen the financial case for housing upgrades and make BBM easings more impactful. Prudential and monetary policy adjustments, like the preferential capital requirements and the lower central bank refinancing rates implemented in Hungary, can also be envisaged. Regulatory streamlining and better data infrastructure can cut administrative costs, making it easier for banks to offer and promote energy-efficiency loans and for homeowners to obtain the necessary documentation. Last but not least, public outreach campaigns can boost household awareness of the financial and environmental benefits. By embedding BBM easings within such a comprehensive policy framework, policymakers can reinforce the transition to sustainable housing while continuing to protect financial stability.

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