Ireland: Consultation Paper On Macro-Prudential Policy For Residential Mortgage Lending

Last Updated: 24 October 2014
Article by Robert Cain, Orla O'Connor and Cormac Kissane

On 7 October 2014, the Central Bank of Ireland published Consultation Paper 87 (Macro-Prudential Policy for Residential Mortgage Lending). A copy of Consultation Paper 87 is available here.

Background

The Central Bank of Ireland (the CBI) is proposing to introduce new regulations in relation to residential mortgage lending. The stated aim of the proposed regulations is to enhance the resilience of the banking sector and households to housing market developments. The proposed regulations will introduce new restrictions on both the loan to value (LTV) and loan to income (LTI) ratios which banks and regulated non-bank lenders such as retail credit firms apply when determining the maximum amount of credit they can extend to a purchaser of a principal dwelling house (PDH) or a buy-to-let property (BTL).

The CBI has considered the appropriate levels of new restrictions in respect of LTV and LTI ratios by analysing the international market. It noted that "macro prudential" tools are already being implemented globally, with a particular focus on the housing market. The consultation paper states that Norway and Sweden have limits on LTV ratios of 80%for new residential mortgage lending, while Finland has a limit (which takes effect in 2016) in respect of real estate loans of 90% (95%for first time buyers) which is weighed against the value of all collateral. In the UK, an LTI cap of 4.5 times salary was introduced in 2014 on 85%of new lending.

The purpose of an LTV limit is to impose a requirement for borrowers to provide a minimum level of deposit based upon the value of the property. The CBI states that lending at high LTVs was common before the financial crisis, with 29% of new loans being issued at over 90% LTV in 2006. Furthermore, it believes that setting an LTV cap will help to prevent "extreme pro-cyclicality" in respect of property lending. The aim of introducing an LTI limit is to reduce the risk of a borrower defaulting on a loan due to a loss of income. The consultation paper indicates that the combination of LTV and LTI caps will create a buffer for both lenders and borrowers against fluctuations in the property market.

The CBI has also set out some additional measures which may be introduced in the future but which are not included in the proposed regulations. It considered a countercyclical capital buffer which would require banks to hold additional capital in times of strong credit growth per the European Union (Capital Requirements) Regulations 2014. A ceiling in respect of a household's debt-to income ratio (DTI) was also contemplated, and the CBI notes that a DTI may be introduced once a centralised Credit Register is created. Finally, an exemption for the LTV limit in respect of those loans which are adequately insured will also revisited at a later date.

LTV Limit

The proposed regulations will introduce an LTV limit of 80% in respect of new residential mortgage lending by banks and regulated non-bank lenders to borrowers for the purchase of property. This includes both equity releases and any top ups on mortgages that would bring the LTV on that property above the cap of 80%.

In respect of investment properties, i.e. BTLs, , the proposal limits new BTL loans above 70% LTV to 10% of all BTL loans issued within a six month period.

In order to allow lenders to utilise their discretion in respect of LTV limits, the proposed regulations permit 15% of new lending to take place above the LTV cap of 80 per cent. This discretion is intended to address borrowers such as those who are unable to provide the necessary deposit but are creditworthy, as well as younger borrowers where it is reasonable to assume that their income will increase in the future.

The proposal sets out three important exemptions from the LTV limits. Specifically, it exempts (1) switcher mortgages (with no increase in principal); (2) mortgages in arrears (i.e. alternative repayment arrangements or other options agreed with a borrower, the purpose of which is to resolve a borrower's pre-arrears or arrears situation); and (3) any loan for the purpose of clearing residual debt from negative equity mortgages.

LTI Limit

The CBI is also proposing to introduce an LTI limit for PDHs of 3.5 times loan to gross annual income. It is proposed that 20% of new lending above this level would be permitted. Both equity releases and any top ups on mortgages that would bring the LTI on that property above the cap are within the scope of the proposed regulations. As annual income is likely to change over time, the CBI has noted that lenders should not rely solely on the LTI limit when determining whether or not to lend to a particular borrower.

The proposal sets out three exemptions from the LTI limit, namely: (1) BTL mortgages; (2) switcher mortgages with no increase in principal; and (3) mortgages in arrears where alternative repayment arrangements or other options have been agreed with a borrower.

Monitoring

Banks and regulated non-bank lenders will be required to submit data on actual drawn loan balances via a specific template. Those who issue housing loans of €50 million or more over the period of 2 quarters must provide the data on a six monthly basis (or a period that the CBI specifies in writing). It is important to note that the first period of calculation will begin as soon as the proposed regulations come into effect. The CBI has highlighted that one the proposed regulations are finalised, they will become effective shortly thereafter.

Timing

The CBI has raised 12 specific questions and invited all stakeholders to make submissions in respect of the proposed regulations by 8 December 2014. It is expected that the regulations will take effect in January 2015.

Mortgage Arrear Statistics

Separately, on 2 September 2014, the CBI published statistics in respect of mortgage arrears and repossessions which help to provide context to the proposed regulations. Some of the key figures include a decrease of 4.7 per cent in the number of mortgage accounts for PDHs in arrears. This is the fourth consecutive quarter where a decrease has taken place. PDH mortgage accounts in arrears over 90 days also continued to fall during Q2 for the third consecutive period. However, the CBI highlighted that there is a continued increase in very long term PDH arrears (i.e. those accounts in arrears for over 720 days).

BTL mortgage accounts in arrears over 90 days increased by 2.3 per cent during the second quarter of the year. Similar to the trend in respect of long term PDH arrears, BTL accounts in arrears over 720 days increased by 9.4 per cent.

Conclusion

It remains to be seen what impact the CBI's use of the macro-prudential measures explained above will have on the domestic housing market, which, in Dublin at least, has seen significant price increases in the last 12 months. Whilst in the short-term there may be a pre-Christmas race to complete house purchases or obtain mortgage approvals, it is hoped that the long-term impact is a more stable and sustainable housing market, which should benefit both the domestic mortgage lenders and home owners. If the measures are successful, it will be interesting to see if the CBI is emboldened to employ macro-prudential measures in other credit sectors where it identifies issues that it believes it can remedy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.