Central Bank had mulled loosening mortgage rules during Covid-19 crisis but opted for unchanged measures through 2021      

The bank's decision to leave its mortgage rules unchanged was the eye-catching measure in the report.
Central Bank had mulled loosening mortgage rules during Covid-19 crisis but opted for unchanged measures through 2021      

Governor of the Central Bank of Ireland Gabriel Makhlouf said the “extraordinary circumstances” of the Covid crisis had so far not led to widespread business failures. Photo: Gareth Chaney/Collins

The Central Bank during the worst of the Covid-19 crisis weighed loosening its mortgage lending rules that help determine the amounts of home loans in the banking system, but thought it better to leave the measures unchanged through 2021.

Talking to reporters on the bank’s latest Financial Stability Review, governor Gabriel Makhlouf said he expects more household and business loans to sour as the Covid emergency runs its course, but that Irish banks were in much better financial health in this crisis to weather the losses. 

Mr Makhlouf said the “extraordinary circumstances” of the Covid crisis had so far not led to widespread business failures but that the economy was not yet out of the woods.

A large part of the Central Bank's review focuses on the commercial and household mortgage markets. That’s because of the devastating effects of the property markets 10 years ago that led to national bailouts for the banks and the State, and the huge increases in unemployment and emigration that the market bust entailed.

The bank's decision to leave its mortgage rules unchanged was the eye-catching measure in the report.

Mr Makhlouf said that housing demand, the supply of new homes, as well as prices continue to be hit by the Covid fallout, and that supply was below pre-crisis levels and would likely miss meeting levels of demand “for an extended period”.

Mortgage activity has recovered since the summer and the bank had not found "much evidence" of credit shortages affecting the mortgage market. “We examined whether a temporary loosening of the mortgage measures might be appropriate to guard against any potential tightening in credit supply by lenders”, but decided the measure would unlikely have had much effect on the supply of credit, Mr Makhlouf said.

Commercial property values had weakened due to the Covid crisis, with retail values and shop rents the worst hit, and there was uncertainty about whether home working would have a long-lasting effect on office supply in city centres, the Central Bank said. It said that “well north” of 80% of borrowers who had tapped mortgage breaks had returned to paying capital and interest in full, but added it was too early to say how many of those borrowers will lose their jobs or income on a permanent basis.

At the end of October, for the retail banks, there were 29,000 accounts still on payment breaks and around €6bn in exposures of lending across all types of loans.

Mr Makhlouf said it could hypothetically decide to tighten mortgage rules next year, if the risks facing borrowers and lenders had increased and should any credit house price spiral show signs of worsening.

The effects of the latest restrictions were less severe than in the spring, but the economy still faced the threat of Brexit, the governor said.

Asked whether the Irish banks have room to cut interest rates for SMEs and households to get them closer to the eurozone average rates, Mr Makhlouf said it was up to lenders to decide on rates. He said the banking market in Ireland was different than in other eurozone countries, reflecting the differences between markets, competition, and the legacy of the financial crisis. On the future of Ulster Bank, the Central Bank would wait for the decision of its owner NatWest, he said.

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