Regulator warns banks on levels of borrowing

Borrowing by consumers has returned to record levels with the Irish Financial Services Regulatory Authority issuing a warning to banks that they need to put more money aside to cover mortgage defaults.

Private sector credit growth accelerated in February, with the level of credit in the economy growing at an annual rate of 29.4 per cent, according to the latest figures from the Central Bank.

This rate of growth equals the rate achieved last October, which was the highest rate recorded in over five years.

Consumers and other borrowers took out an additional €5.6 billion in loans last month, bringing total debt outstanding to €268 billion. Households account for almost half of this debt.

With interest rates poised to rise again, the financial regulator Patrick Neary has announced that mortgage lenders must now set aside more funds - known as reserves - to make sure they are covered by the risk that borrowers may not be able to repay their loans.

The regulator said yesterday that the ongoing growth in mortgage lending was the subject of close supervision.

He said the mortgage market remained strong and profitable and there were no signs of any weakening in demand. But the regulator added that it was now appropriate for lenders to set aside additional capital to cover mortgages where the size of the loan exceeded 80 per cent of the value of the property.

The Financial Regulator said the changes, which it has introduced in consultation with the mortgage lenders, were being brought in at a time when financial institutions were in a position to set aside a cushion of capital for the future.

Analysts suggested yesterday that the measure was part of an effort to cool down an overheating property market.

The new measure will most affect lenders with a high proportion of first-time buyers, which includes the Republic's two largest lenders, the Bank of Ireland and Permanent TSB.

The cost of setting aside extra capital could be passed on to borrowers in the form of higher interest rates. First-time buyers who take out 100 per cent loans already pay higher than average interest rates than most first-time buyers, who typically borrow 92 per cent of the purchase price and fund an 8 per cent deposit using their own savings.

Costs for borrowers are likely to increase further over the next few months, as lenders pass on expected increases in interest rates from the European Central Bank (ECB).

Economists now believe that the ECB will raise interest rates again as early as May, following increases totalling half a percentage point in December and March.

Interest rates are predicted to go up by a further three-quarters of a percentage point by the end of the year.

If lenders pass the increases on to homeowners, this would add over €100 to the monthly repayments on a typical €250,000 mortgage being repaid over 30 years.

The Central Bank figures show that demand for mortgages continued in February, with a 29.6 per cent annual growth in residential mortgage lending.

A further €2.1 billion was advanced to homeowners during the month. But the growth was boosted by the reclassification of some term loans to mortgages. When this is taken into account, the annual growth rate in residential mortgages actually fell to 27.7 per cent.

Non-mortgage credit grew by 29 per cent in February, up from a rate of 28.5 in January.

Strong retail sales meant that consumer credit accounted for a fifth of this growth, the Central Bank said.