30 Jan Central Bank announces new regulations on residential mortgage lending

This week, the long awaited regulation for home buyers was released by the Central Bank following their extensive consultation process. Here’s the press release.

The Central Bank of Ireland today (27 January) announced the introduction of new regulations which will apply proportionate limits to mortgage lending by regulated financial services providers in the Irish market. The key objective of these regulations is to increase the resilience of the banking and household sectors to the property market and to reduce the risk of bank credit and house price spirals from developing in the future. It is expected that the regulation will be introduced under legislation in the coming weeks.

The measures introduce proportionate limits for loan to value and loan to income measurements for both primary dwelling houses and buy to let mortgages. The limits are supplementary to individual banks’ credit policies and are not designed as a substitute for lenders’ responsibilities to assess affordability and lend prudently on a case-by-case basis.

Loan to Value (LTV) for principal dwelling houses (PDH)

There are different limits for different categories of buyers:

• PDH mortgages for non-first time buyers are subject to a limit of 80 per cent LTV.
• For first time buyers of properties valued up to €220,000, a maximum LTV of 90 per cent will apply. For first time buyers of properties over €220,000 a 90 per cent limit will apply on the first €220,000 value of a property and an 80 per cent limit will apply on any excess value over this amount.
• The cumulative monetary value of loans for principal dwelling purposes which breach either of these limits should not exceed 15 per cent of the euro value of all PDH loans on an annual basis.

Housing loans for borrowers in negative equity who wish to obtain a mortgage for a new property are not within the scope of the LTV limits.

Loan to Value (LTV) for Buy to Let mortgages (BTLs)

• BTL mortgages are subject to a limit of 70 per cent LTV.
• This limit can only be exceeded by no more than 10 per cent of the euro value of all housing loans for non PDH purposes during an annual period.

Loan to Income (LTI) for PDH mortgages

• PDH mortgage loans are subject to a limit of 3.5 times loan to gross income.
• This limit should not be exceeded by more than 20 per cent of the euro value of all housing loans for PDH purposes during an annual period.

Switcher mortgages and housing loans for the restructuring of mortgages in arrears or pre-arrears are not in the scope of the Regulations.

Governor Patrick Honohan said, ‘These measures will reduce potential financial vulnerabilities for both borrowers and the wider economy and will help ensure a stable and well-functioning mortgage lending market.

‘We have carefully considered all feedback received through the consultation process. As far as the LTV limits are concerned, we are retaining the basic 80 per cent LTV limit for owner-occupier loans and 70 per cent for buy-to-lets with the proportionate allowances already announced. At the cost of some additional complexity, but without compromising the overall effectiveness of the measures, we are increasing the limit for first-time buyers of lower-cost houses.

‘Although they have been designed to be stable, the requirements are flexible enough to be adjusted in the future should the need arise without the need for a long period of consultation.’

Deputy Governor, Stefan Gerlach, said, ‘In Ireland we are still experiencing the destabilising effects of a property bubble. We have based these regulations on in-depth economic analysis and empirical evidence. Measures such as these should be a standard part of a well regulated financial system.’

Deputy Governor, Cyril Roux, added, ‘These measures are complementary to existing banking regulations. They are not intended to replace lenders’ own credit underwriting policies, which need to take account of their relative capital strength, their risk appetite framework and the individual creditworthiness of prospective borrowers. We expect lenders will continue to define and implement rigorous and prudent standards to their own internal credit assessments policies and procedures, making all lending decisions on a case-by-case basis as well as meeting the requirements of the Consumer Protection Code and other regulations. Lenders are required to begin implementing the requirements immediately, with reporting on compliance with the requirements due to be submitted to the Central Bank by the end of the year.’

The Central Bank will also publish a feedback document providing an overview of responses to the submissions made during the consultation process and the review process undertaken by the Central Bank. All submissions made in response to the consultation paper will be made available on the Central Bank website.

A series of economic papers and additional research undertaken by the Central Bank during the course of the consultation will also be published in the coming days. The END.