Central Bank may introduce income limits for mortgages

Bank says ratio tools reduce credit risk and improve resilience of system

The Central Bank of Ireland is considering imposing limits on the income multiples financial institutions here use when giving residential mortgages.

It is understood that the regulator will issue a consultation paper this month on the imposition of limits as it seeks to gather views from the banking sector and other interested parties.

This move comes as property prices begin to soar again, with Dublin prices up 25 per cent in the year to August.

Prudent lending

The Central Bank is keen to ensure that prudent lending standards are followed by the banks as the property market takes off, in order to avoid mortgage arrears building up.

A paper the bank published yesterday entitled Macro-prudential tools and credit risk of property lending at Irish banks says tools such as ratio caps for loan-to-value (LTV) and loan-to-income (LTI) "improve the resilience of the banking system by reducing the credit risk on new lending".

The paper says the default rate on loans issued near the peak of the cycle to first-time buyers is particularly sensitive to LTV at origination while those issued to non first-time buyers are sensitive to both LTV and LTI at origination.

Defaulted loans

In addition, there is a “sharp increase” in the losses on defaulted loans for those issues above 85 per cent LTV.

“Although lending at higher LTI ratios has decreased significantly, 50 per cent of new lending to owner-occupiers was at LTV levels above 80 per cent in 2013,” it says.

Almost a fifth of mortgages in the State are in arrears.

The paper says, “The recent rising trend in house prices warrants attention due to the potential risk to new lending in the presence of volatile property prices.”

A report published by stockbroker Davy this week questions recent lending practices of Irish banks and says there is an "onus" on the Central Bank to put limits in place.

“It appears some banks are willing to lend 4.5 times’ combined income to higher-rated borrowers, but this is at the upper end of what is typically deemed responsible internationally,“ Davy said.

“Typically a limit of 3-4 times is considered a more acceptable level.”

The Central Bank declined to comment yesterday on its consultation paper.

Ciarán Hancock

Ciarán Hancock

Ciarán Hancock is Business Editor of The Irish Times