Bank of Ireland is preparing to make it more difficult for borrowers to secure new mortgages as it tightens up its affordability criteria against the backdrop of rising interest rates and living costs.
The bank has told mortgage brokers that it is continuing to monitor the repayment capacity of new mortgage applicants against potential rate increases that may occur over the life of a loan. It said that adjusted calculators assessing affordability will be live from next Tuesday.
Bank of Ireland did not indicate to brokers what changes it will be making to its stress testing. Lenders in the State are already required by the Central Bank to stress test all new mortgage applications against the possibility of rates increasing by 2 percentage points from their starting level.
A spokesman for the bank declined to comment on the planned stricter mortgage lending standards.
“Assessing a loan application involves stress-testing across a number of scenarios to ensure the loan is still affordable if things change. This has always been a feature of mortgage assessments and we keep it under ongoing review,” he said. “This is to ensure that prospective new customers are protected against potential shocks given the current economic environment.”
The development follows recent moves by two non-bank lenders to tighten affordability criteria. ICS Mortgages decided last month to temporarily restrict new home loans to 2.5 times borrowers’ gross income, compared to the 3.5 times limit set by the Central Bank for most loans. First-time buyers approaching ICS for a mortgage now must have a 20 per cent deposit, while movers must provide 30 per cent.
ICS also imposed a stipulation that prospective borrowers must show that they will have €1,000 at the end of every month, after monthly living expenses and mortgage payments at current rates, to secure a new home loan, according to sources.
Finance Ireland decided last week to impose a similar type of buffer, but at a lower monthly level of €250 for new business, sources said.
ICS and another non-bank lender, Avant Money, raised rates on certain mortgage products after the European Central Bank (ECB) hiked its main rates by 0.5 of a percentage point in July. The expectation in the market is that retail banks will decide soon to increase the cost of their variable and new fixed-rate loans, after the ECB move last week raising its rates by a record 0.75 of a point. AIB said on Wednesday that it will make a decision on rates within weeks.
Increased concerns about lending risks come after the banks spent more than a decade lowering non-performing levels. Debt ratings agency DBRS Morningstar highlighted in a report on Thursday that legacy mortgage issues “are still persistent in Ireland” as it drew focus on how some boom-era borrowers that took out interest-only mortgages have been having difficulties in recent years repaying or refinancing their outstanding balance as the loans mature.
“The increasing interest rates, macroeconomic constraints and macropolitical uncertainties may put further negative pressure on distressed borrowers in Ireland and reverse the positive trend of reducing mortgage arrears achieved over the past decade,” it warned.
A Central Bank note published last month estimated that up to a third of lower-income Irish mortgage holders could face financial distress trying to meet loan repayments if recent levels of inflation are maintained. The paper defined a homeowner as being “at risk” of financial distress when their residual income is less than 10 per cent of their monthly mortgage payments, after meeting home loan obligations and paying for essential non-housing items.
The economist estimates that in a severe case of Irish inflation amounting to 9.1 per cent for 2022 as a whole, some 32 per cent of the mortgaged households in the lowest-quarter income range would fall into the “at risk” category. That is up from 26 per cent before the recent inflation shock.
