The case for ending the uncertainty on mortgage lending

The Central Bank on October 9th issued a consultation paper on mortgage lending to ensure that recent history is not repeated, and that a property bubble does not again cause a banking collapse. The bank is concerned that escalating house prices in Dublin – up by almost one quarter in the past year – represent a potential threat to financial stability. It has sought to check their rise by imposing lending restrictions.

The bank has proposed tight limits on lenders and borrowers, by capping loan-to-income (LTI) and loan-to-value (LTV) ratios, making it harder for first-time buyers and buy-to-let investors to access mortgage finance. The deputy governor of the Central Bank, Cyril Roux, said the proposed measures are meant to ensure "borrowers and lenders can withstand potential economic or property market shocks in the future without financial distress". The Central Bank's proposals, which have been open for discussion for two months, have met with a critical response.

The Department of Finance in its response - while accepting the need to set limits on mortgage lending – favours a more flexible and graduated approach in doing so. The Central Bank has proposed that borrowers must have a 20 per cent deposit to secure an 80 per cent loan, which is limited to a multiple of three times income. But for those already paying rent, while also saving for a deposit to secure a mortgage, the increased deposit requirement makes house purchase increasingly unaffordable.

The Economic and Social Research Institute (ESRI) in its submission has also been critical of the bank’s proposals, arguing that the loan and income limits prescribed could curtail the housing supply at a time of acute housing shortage.

At present, an estimated 25,000 new residential units are required each year to satisfy demand, but some 9,000 units have been built annually in recent years. The bank’s proposals have resulted in months of uncertainty for aspirant home buyers as they await its decision on mortgage lending. This the Central Bank should now quickly deliver.