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IT IS OFTEN assumed that the mortgage measures are of relevance only to house buyers. This is not the case.
In line with the Central Bank’s mission to safeguard stability and protect consumers, the mortgage measures are central in ensuring the stability of the financial system as a whole. And every person has a stake in that crucial objective.
In Ireland, we know only too well the painful problems caused by reckless lending and over-indebtedness.
The mortgage measures are designed to ensure that banks lend sensibly, house buyers do not over-borrow and excess credit does not build up within the Irish financial system.
Given the importance of this framework, it is wise to review the mortgage measures on a regular basis.
Today’s review is based on wide-ranging analysis by the staff of the Central Bank and has benefited from the approximately fifty external submissions we received from our public consultation process over the summer.
Overall, the review has confirmed that the mortgage measures have been successfully implemented – the banks are operating within the measures, leading to sensible lending patterns, which in turn are contributing to financial stability. The overall framework is appropriate.
The evidence shows that the probability of default for mortgages taken out under the measures is lower. Put simply, those who bought properties under the measures are better prepared to manage their mortgage payments in the event of a future downturn in the economy.
The framework requires borrowers to satisfy two requirements: A maximum loan to income (LTI) ratio and a minimum deposit relative to the size of the loan, known as the loan to value (LTV) is not too high.
Excessively high LTV ratios fail to provide sufficient insulation in the event of a downturn in house prices, pushing borrowers into negative equity.
Time for change
Today, we are announcing some limited refinements to improve the effectiveness and sustainability of the LTV regulations, ensuring a more durable framework for the long-term.
All first-time buyers will now be required to provide a minimum deposit of 10% of the value of the property, with the LTV ceiling set at 90%.
This replaces the current system whereby a deposit of 10% was required on the first €220,000 of the price of a property and 20 per cent on the balance above €220,000.
The requirement for second and subsequent buyers to provide a minimum deposit of 20% when taking out a mortgage remains unchanged.
The buy-to-let requirements also remain unchanged, requiring investors to raise a minimum 30% deposit.
Why the change in the case of first-time buyers?
There are two main reasons for this refinement. First, the current system is complex and would require regular updating, given that the economic and financial impact of the €220,000 threshold would necessarily shift in line with the evolution of incomes, house prices and other factors.
Under the new system, the measures should require adjustments only if wider macro-financial conditions – such as material shifts in credit patterns or financial stability conditions – warrant revisions.
As an illustration, this simplification shifts the LTV ceiling for a €300,000 mortgage from 87.3% under the previous system to 90%.
Second, there was evidence at the time of the introduction of the measures showing that first-time buyers defaulted less than second-time and subsequent buyers, with the differential in default probabilities especially strong in the case of lower-valued properties.
However, the most recent data show that the differential in default probabilities is no longer weaker for higher-value homes than for lower-valued homes, eliminating an important justification for the current asymmetric treatment of lower-valued and higher-valued properties in the LTV regulations.
We are also refining the degree to which lenders can grant loans in excess of the LTV limits for a limited percentage of their loan books.
Providing some capacity to lend in excess of the LTV limits allows banks to take into account the specific circumstances of individual borrowers, which sometimes may justify a higher LTV ratio.
There will now be separate allowances for first-time buyers and second and subsequent buyers.
In the long-term, this will give the Central Bank flexibility to adjust these specific limits in a calibrated way if threats to financial stability emerge.
The 20% allowance for banks to lend in excess of the LTI ceiling remains unchanged.
Finally, we have also decided to extend the current valuation period from two months to four months, to take account of the fact that some sales can take longer than the average of three months.
It is critically important to appreciate that our framework sets limits on the size of mortgages: the LTI and LTV ratios are not targets but ceilings.
In buying a home, households should take into account the risk protections offered by higher deposits, meaning they have less reliance on mortgage debt.
Equally, lenders should assess the loan-bearing capacity of each mortgage customer and restrict the size of the mortgage if indicated by the credit risk analysis.
Everybody gains from the prudent borrowing and lending patterns that are essential for a stable financial system: this is precisely what the Central Bank is seeking to protect through its mortgage measures.
Philip Lane is Governor of the Central Bank of Ireland. He is a Professor of Political Economy at Trinity College Dublin and a former assistant professor at Columbia University. He graduated with a PhD in Economics from Harvard University in 1995.
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Solving the climate crisis and emissions is really about making the majority reduce their consumption through using less or paying more taxes so the elite can carry on as normal. If the govt or the world as a whole were serious then we would each have a carbon allowance, but how would that work, far easier to tax the lower income people on fuel for their cars,houses etc than ask the wealthy to stop flying private jets, driving cars that do 20mpg and leave a carbon footprint that’s massive compared to ordinary people.
If the ordinary car is such a threat, why are people being asked to go electric when to do so would either bankrupt them or mean they simply couldn’t afford a car. Its simply not going to happen unless somebody is making a fortune out of it.
@Rex Tilson: absolutely. A survey in the U.K. found that the top 15% of flyers took 70% of flights in that year (2014). Their Carbon costs are even higher because the top 15% fly more long haul and private jets. 50% of people didn’t fly that year but they did fly every second or third year.
Increasing carbon taxes would have little effect in any one year as it would penalise the people taking only 30% of the flights. Most of top 15% are rich enough to continue flying.
A voucher allowing one short haul return per person would massively reduce those flights while not affecting the bottom 85% of flyers who take one or none every year. Maybe corporations can have a few more vouchers. Otherwise – zoom.
At the very least we should ban private jets – are we all in this together or not.
There are chasms between Government words/plans and their actual actions, from health, education, infrastructure, etc decades of incompetence and cronyism.
The climate change advisory council?? Money for old rope for sure isn’t it. Anyway we the people soldier on. Chin up folks.
What’s telling for me, is the amount of rubish that comes outta the journal and all the other outlets singing from the same script. Money most be worth it, won’t last long.
Blah blah blah is right…..Go talk to the Chinese & American’s first
@Christopher Byrne: yep, and then we’ll be fed the same BS that the smallest countries must lead by example first.
according to the ESB data centres use 1/3 of the grids capacity. we bow to america all the time,,,banking crises, housing crises, homelessness, i think they global mind is changing and corporates with larger finances than countries are eventually gonna get reigned in. ofc we are gonna be the last to do it as usual. gombeen politics.
@Mick Heery: I understand that DC’s use a lot, but, do you have a link for the above claim of 1/3rd usage please?
The fact that Ireland has yet to switch to E10 petrol is very telling as to the seriousness of our climate strategy. Literally the lowest hanging fruit, it would remove the emissions equivalent of 100,000 cars off the road practically at the stroke of a pen. If we can’t do something that simple, I’m not sure we’re up to the more serious tasks..
Completely shutting down the import of UK car market totally contradicts govs emission fairytales since local consumer can not get a cleaner – newer car that falls under low co2 regulations from abroad (Since UK is the ONLY AND CLOSEST PLACE where wheel ks right-handed) leaving Irish motorists to use the old diesel engined cars since the car prices are sky high on the island.
The first thing that needs to happen is that people’s attitude needs to change so that they genuinely care and are motivated to make changes to support these goals..
I honestly believe that all the talk in this article will not make people care and threats will only make people do the opposite.
Governments here have a very poor track record on bringing people together as one Nation.
@Roger Bond: people’s attitudes will only change when they see politicians stop squandering billions on every single development they touch.
Start producing results. Not just throwing more taxes at people with no end result visible.
Personally I am more concerned about affording to put fuel in my car, getting appointments at hospital and paying my mortgage.
Regarding climate change I’m inclined to listen to someone who has seen it first hand & that’s David Attenborough, he has said due to climate change & it causing methane gas immissions there’s going to be at least 4/5 viruses per annum!
@Colette Kearns: Sir David frederick attenborough collette. Agree
“Climate Experts” … well. Looking through the history of mankind, the “Climate Experts” helped the society to deal with changes to the climate. They didn’t have computers or smartphones, but an open mind and common sense.
But now that we are in the days of “peoplekind”, our experts are more like the experts of the Aztecs. When the climate changed back in their days, their answer was to kill thousands in order to please their gods, so they’d stop the climate change.
I don’t want to hear another squeak about Planning for more big wind and solar, without first hearing all about the Planning for how they intend filling in the big intermittency gaps. Massive electrolysis plants here or there. Mega grid all over the place.
In reality though all this carbon account game, is just that, a silly game. The only way we will solve this problem is by fighting it as a Warming World War. We need the military industrial combines to stop making weapons and instead make thousands of new generation SMRs. and let the Australians make the fuel for them, instead of exporting vast quantities of coal.
More methane is already boiling out of the permafrost, than from a billion more cows. What the hell are we on about. If we could solve the problem by virtue signalling, it would be solved long ago.
@Nicholas Grubb: I agree…last night on Eirgrids dashboard there was nearly 4000MW of wind available but the grid could only absorb 2000MW so nearly 2000MW of wind power had to be turned off all night but the wind turbine owners still get paid for the curtailment.
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