Our mortgage is 3.15 times my gross salary, so it's bit under the new Central Bank lending loan-to-income limit.
IMO, this is a failure of the CB rules. You might have been within the limits but in your mid-40's with a single income, 5 dependents and no pensions, the bank should never have allowed you to borrow that amount as it is now putting you under pressure
I fully agree. These rules are the same for a 25YO as a 45YO.
The younger person has of course longer to pay the loan off and is likely to see income increase over time. For the older person it's the opposite, earnings peak on average at about age 50.
I think that these rules are substituting for sensible risk assessment both by banks and borrowers. This was never what they were designed for. @pacmon has a lot of debt for his age, income, and asset position. I think it could turn out well once spouse returns to work and large pension contributions start being made, but it's a lot of risk.
The Central Bank rules are designed primarily to protect the banks from themselves.
The OP will be able to repay this loan by retirement.
They made a choice to have 4 kids and they can afford them although their retirement will not be as comfortable as it would otherwise be. But that is a perfectly valid choice to make.
It is a valid choice from the OP's perspective but the bank should protect themselves against it. Single income, 5 dependents and currently no pension should be a major red flag for any bank during underwriting.They made a choice to have 4 kids and they can afford them although their retirement will not be as comfortable as it would otherwise be. But that is a perfectly valid choice to make.
Being able to repay and being able to afford are two very different things. If nothing changes income wise, they will really struggle to fund 3rd level and pensions. The bank will be happy but the OP will be in a difficult financial position at retirementThe OP will be able to repay this loan by retirement.
And in this instance the rules have failed to protect the bank from itself. The risk profile of OP should be very high and the bank should take this into account and limit the lending to much less than 3.5The Central Bank rules are designed primarily to protect the banks from themselves.
I disagree a bit. Simple rules are better than complex ones, CBI is just targeting the wrong variable.I fully understand the reason for these limits but I don't believe a blanket 3.5x income is the right way to do it. It should be on a sliding scale that factors in age, dependents and pension provision
I agree but some of those factors are inherently captured by by your method.Simple rules are better than complex ones, CBI is just targeting the wrong variable.
Limit should be simply debt servicing costs to net income (assuming loan paid by retirement)
The biggest problem with the current rules is that they are invariant to the interest rate cycle. An LTI of 3.5 meant something very different in 2015 when rates were well north of 3% from early 2022 where they were briefly below 2% for one lender. I think that the rules should adapt as interest rates do. The best way to do this is debt service (and this includes all debt) as a share of household disposable income - something like <35% on the basis of today's interest rates, and <40% stressed for another 100bps.
I have no first-hand knowledge, but my guess is that macro-prudential rules are substituting for sound, loan-level risk assessments at Irish lenders. This is again a function of the conservatism of the rules . In most cases LTI<3.5 and LTV<90% is very prudent at loan level, but here we've seen that both bank and borrower than that something is prudent at individual level on the basis of a set of rules that are designed to limit house prices at the level of the market.
So then my next question is where is the micro-prudential supervision coming from? Is it the CBI? How are these corner cases investigated?Banks are also subject to micro-prudential supervision
I have no first-hand knowledge, but my guess is that macro-prudential rules are substituting for sound, loan-level risk assessments at Irish lenders. This is again a function of the conservatism of the rules
So then my next question is where is the micro-prudential supervision coming from? Is it the CBI? How are these corner cases investigated?
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