Central Bank could relax mortgage rules

Central Bank governor Patrick Honohan has signalled that there could be an easing of the rules that will require mortgage applicants to stump up a 20% deposit.

Last month, the Central Bank said that, from the start of 2015, new lending rules would mean that vast bulk of house buyers would have to put down a 20% deposit on the value of the property and there would be a limit of 3.5 times income.

However, at a speech to be delivered later today, Mr Honohan will outline the role mortgage insurance could play in enabling some customers secure higher loan-to-value mortgages.

Citing the example of the US, Mr Honohan will say: “Mortgage insurance is a method that has been used in that country (and others) for almost a century to enable borrowers to obtain finance for housing without actually having to save the 20% that would otherwise have been insisted upon by the lenders and their regulators.

“The Central Bank’s recent consultation paper pointedly raises the question of whether adequately insured mortgages should be allowed to exceed the general 80% rule which has been proposed — this might cover up to 90%, for example. While we point out that too liberal a use of such insurance can have the effect of neutralising the effectiveness of a ceiling on loan-to- value ratios as a mechanism for preventing house price bubbles (and while it typically provides no protection to the borrower), this would be less a concern if limited, for example, to relatively small loans and/or first time buyers.

“Of course, mortgage insurance would achieve relatively little if it merely shuffled systemic risk around within the domestic economy: external insurance from solid insurers would be needed. I look forward to the responses on this matter, including on the practical issues of implementation that might be entailed.” There has been a political backlash against the proposed Central Bank rules. Tánaiste Joan Burton, said it would be very difficult for first time buyers to get on the property ladder if they have to save for a 20% deposit. Bank of Ireland CEO Richie Boucher, appearing before the Oireachtas Finance Committee on Thursday, said his bank operated in countries where mortgage insurance operated. Moreover, he would be open to the idea of mortgage insurance in Ireland.

Mr Honohan will also say that limiting high loan-to-income mortgages will ensure consumer protection in the future: “By limiting the quantum of mortgages that can be made at high loan-to-income multiples, it could be argued that we at the Central Bank are moving into the nudge territory at the macro level. It doesn’t mean that no borrower will become over-indebted. For one thing we do envisage continuing to allow high LTIs — just not too many of them.

“For another, current income is not a perfect predictor of future income. So our proposed macro-prudential measures will not substitute for good loan appraisal decisions by banks (who are not, according to our code of conduct, supposed to make loans except they be affordable and suitable for the borrower), and good financial decisions by the borrower. But limiting the volume of high LTV and LTI loans for macroeconomic and financial stability reasons should have a beneficial consumer protection side-effect in reducing the re-emergence of over-indebtedness.”