Record rents may put pressure on Central Bank to ease lending rules

Studies support existing caps on lending as a proportion of income and property value

Record rent levels may see the Central Bank ease rules on mortgage lending slightly.

Goodbody analyst Eamonn Hughes said wholesale changes were unlikely under the ongoing annual review of limits on lending for home loans, but he added that there may be some “tweaks” favouring first-time buyers in the Greater Dublin Area.

His comments come as the Central Bank published a series of studies on the mortgage lending controls and their outcomes. The reports were supportive of the existing lending regime.

They found, among other things, that homeowners are now spending only around a quarter of their after-tax income on mortgage payments. The figure relates to mortgage loans drawn down this year and is noticeably lower than in 2008, when mortgage payments accounted for up to 40 per cent of net income.


As it stands, mortgage lending is, for the most part, capped at 3½ times applicants’ income and 80 per cent of the value of the property. The regulator has come under increasing political and industry pressure to ease the rules, which it put in place to avoid a repeat of the excessive mortgage leverage by property owners ahead of the financial crash.

Brokers Ireland said that, while falling mortgage costs were welcome, rents were now “substantially higher than mortgage repayments”.

“In many ways, mortgages are becoming the preserve of those on higher incomes or those fortunate enough to have family support to acquire a mortgage,” said Rachel McGovern, director of financial services at the insurance industry group.

Disposable income

The Central Bank study, by Jane Kelly and Elena Mazza, says the loan-to-income cap places an effective maximum on amount of disposable income that will go to meeting mortgage costs and improves borrowers' chances of coping with higher interest rates or loss of income.

A separate paper shows that a larger proportion of new borrowers are drawing down loans right at the limits. Central Bank economist Edward Gaffney finds that those close to drawing down the maximum available are more likely to be first-time buyers in the Greater Dublin Area, those drawing down allowances, and those on household incomes of €70,000-€80,000.

He also finds that the majority of these borrowers would have taken on higher levels of debt relative to their income in the absence of the measures, suggesting the measures are serving their function.

The assessments also confirm that first-time buyers remain less likely to default than previous home owners since the Central Bank macroprudential rules were introduced. Allowance was made under the rules for first-time buyers to access a higher loan-to-value (90 per cent) than was available to existing homeowners (80 per cent) on the basis that evidence at the time pointed to a lower risk of default and subsequent Central Bank research of the experience since the lending rules were imposed has confirmed that view .

The outcome of the review of the current rules will be announced on December 4th.

Dominic Coyle

Dominic Coyle

Dominic Coyle is Deputy Business Editor of The Irish Times