Central Bank wants your views on the mortgage lending limits

Brendan Burgess

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Press Release - 14 July 2021

Have your say on the Central Bank’s Mortgage Measures Framework Review



· First review of the overall policy framework for the mortgage measures since their introduction in 2015.

· Engagement with the public will be a core element of that review.

· Review aims to ensure that the Central Bank’s policy framework remains fit for purpose into the future, amid continued evolution of the financial system and economy.

The Central Bank of Ireland has commenced a comprehensive review of the policy framework for the mortgage measures. The mortgage measures were introduced in 2015 to support a sustainable provision of mortgage finance, strengthening the resilience of borrowers and lenders and guarding against the risk that another credit-fueled housing boom emerges.

The review of the overarching framework aims to ensure the mortgage measures continue to remain fit for purpose into the future, in view of the continued evolution of our financial system and economy. While the annual assessment of the measures will take place as usual later in the year, this broader review will focus on the overall policy framework, strategy and toolkit for the mortgage measures.

As part of this process, we want to hear from the public on their own experiences. To allow as many people as possible to input we have launched a new online survey. The public survey invites people to share their views and experiences on the functioning of the mortgage measures to date, their perspectives on what a sustainable mortgage market looks like, and what elements of the mortgage measures they think the Central Bank’s review should focus on. This will inform the framework review, which will run throughout 2021 and 2022.

Director of Financial Stability, Vasileios Madouros, said: “The mortgage measures are an integral and permanent feature of Ireland’s macroprudential policy framework. Since their introduction, they have played a key role in building resilience of both borrowers and lenders and have guarded against the emergence of an unsustainable, credit-fuelled housing boom.

“In line with best practice, in addition to assessing the functioning and calibration of the measures every year, we believe it is important to occasionally review the overall policy framework, strategy and toolkit. This will ensure the mortgage measures remain fit for purpose, not just now, but into the future.

“Engagement with the public will be a core element of our review. We know that behind the economic data and evidence that we look at, lie people’s own lived experiences. Understanding those experiences better will strengthen the effectiveness of our review. So I encourage people to complete our online survey.”

The survey will close at 17:00 on 30 July 2021 and can be completed in English at centralbank.ie/survey or Irish at centralbank.ie/suirbhe

ENDS

Notes to Editor


Further information on the Central Bank Mortgage Measures can be found on the Central Bank’s website and in our Explainer “What are the mortgage measures?”

Further information
 

Brendan Burgess

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I filled in the survey.

Theme 2 – Describing a sustainable mortgage market

What does a sustainable mortgage market mean to you? For example, what do you think is a manageable and sustainable amount of debt to take on in order to purchase a property?

What are the best ways to avoid repeating mistakes of the past in terms of excessively loose lending standards leading to widespread financial distress?


My reply:

What is sustainable rent?

A mortgage is just renting money.

So while someone can afford to pay the interest on their mortgage it is sustainable for them.

It is also very profitable for the lender. The lender should not want a borrower who is paying market rate interest to repay capital. They will only lend it out again.

The idea that a mortgage must be repaid in full by age 65 , has evolved from custom and practice. there is really no rational basis for it.

Having said all that, a 90% mortgage is risky for both borrower and lender. In fact, an 80% mortgage is risky for both borrower and lender.

But once a borrower has reduced the mortgage to below 60% of the value of the property, there should be no obligation on them to repay further capital.

Of course, it may be the right thing for the borrower to do - to clear their mortgage before investing in a pension or buying a new car. But that should be their choice.




Any other feedback

The lack of supply and high prices are caused by government policy.

It is not the role of the Central Bank to attempt to fix these problems through allowing reckless lending.

The medium to long term objective of the measures should be a maximum LTV of 80% for First Time Buyers and 70% for SSBs.

The lack of supply and high prices are caused by government policy.

It is not the role of the Central Bank to attempt to fix these problems through allowing reckless lending.

The medium to long term objective of the measures should be a maximum LTV of 80% for First Time Buyers and 70% for SSBs.

I have long called for the Central Bank to define what a sustainable mortgage is. That was in the context of mortgage arrears. It is now time for the Central Bank to discuss this issue and produce a definition which would provide guidance to borrowers and the courts.
 

Sarenco

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I completed the survey and suggested that the measures should be retained with the following two tweaks -

1. Replace LTI limit with a (total) debt-to-income (DTI) limit; and
2. Set the DTI ratio at 4:1, to reflect the falls in mortgage rates since 2015.
 

MugsGame

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I've worked in references to non-recourse loans and pensions (even if I can't borrow from my pension, this could form part of the affordability criteria - I should not be penalized by saving for a pension).
 
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Brendan Burgess

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IPAV has called for the limits to be increased to 4.5 times income for people earning up to €60,000.


I debated this just now on the Pat Kenny show on Newstalk with Jim Power who wrote the report for IPAV.

I argued that it is not the Central Bank limits that are stopping people buying houses. It is the high prices and the lack of supply.

Allowing people borrow 4.5 times their income would not solve the problem - it would just make matters worse by pushing up the prices and leaving people with much bigger mortgages for the same house.

Brendan
 

Eireog007

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I heard the “debate” as I was heading back to the office. Granted I have a bias in that I already agree with your viewpoint on the 3.5 times salary restrictions (despite getting an exemption myself) but you can always tell who is winning a debate based on which person remains calm and sticks to facts and figures and which person raises their voice constantly, interrupts frequently and resorts to sarcastic remarks when failing to provide relevant details.
That being said I can still see far too many people siding with the give me more money brigade despite the obvious downsides.
 

Sarenco

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Well, mortgage rates are now at least 25% lower than they were when the Central Bank's mortgage rules were originally introduced in 2015.

I think the LTI could be raised somewhat (perhaps to 4 times salary) to reflect the lower cost to borrowers of servicing a mortgage today.
 

odyssey06

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IPAV has called for the limits to be increased to 4.5 times income for people earning up to €60,000.


I debated this just now on the Pat Kenny show on Newstalk with Jim Power who wrote the report for IPAV.

I argued that it is not the Central Bank limits that are stopping people buying houses. It is the high prices and the lack of supply.

Allowing people borrow 4.5 times their income would not solve the problem - it would just make matters worse by pushing up the prices and leaving people with much bigger mortgages for the same house.

Brendan
I agree with you on the impact of the change.

But are you answering the right question - from the Central Bank's perspective I mean.

Are the limits intended by the CB as a mechanism for slowing down house prices rices and creating a more stable housing market?

Or, are the limits intended to ensure people are able to repay their mortgage without getting into debt \ difficulty?
In which case borrowing 4 or 4.5 times may be of no concern to the CB as long as they can repay even if it means higher house prices.
 

Eireog007

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Well, mortgage rates are now at least 25% lower than they were when the Central Bank's mortgage rules were originally introduced in 2015.

I think the LTI could be raised somewhat (perhaps to 4 times salary) to reflect the lower cost to borrowers of servicing a mortgage today.
The figures back that up but in the same vein of putting congestion charges in the inner city or increasing carbon taxes they are absolutely an appropriate measure to take but they have to be introduced after other measures to avoid exacerbating the problem (Increased housing supply/more public transport/grants for housing upgrades)
 

24601

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I agree with you on the impact of the change.

But are you answering the right question - from the Central Bank's perspective I mean.

Are the limits intended by the CB as a mechanism for slowing down house prices rices and creating a more stable housing market?

Or, are the limits intended to ensure people are able to repay their mortgage without getting into debt \ difficulty?
In which case borrowing 4 or 4.5 times may be of no concern to the CB as long as they can repay even if it means higher house prices.

The intention of the limits seems to be all of those things. According the the CBI website:
The Central Bank is committed to annually reviewing the calibration of the mortgage measures in the context of wider housing and mortgage market developments, to ensure that they continue to meet their objectives of:

  • Increasing the resilience of banks and borrowers to negative economic and financial shocks
  • Dampening the pro-cyclicality of credit and house prices so a damaging credit-house price spiral does not emerge.
 

Brendan Burgess

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who is winning a debate based on which person remains calm and sticks to facts and figures and which person raises their voice constantly, interrupts frequently and resorts to sarcastic remarks when failing to provide relevant details.

Interesting. I was very surprised at Jim's tone. I think he was very frustrated because Pat was challenging him as well. But his comments were very personalised, which I found odd. I would be more used to that from David Hall or a politician, but not in an analysis piece.


Brendan
 

LS400

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Allowing people borrow 4.5 times their income would not solve the problem

Maybe not for everybody, but it will for many.

For a couple earning a reasonably modest salary of €70k, they have some chance of getting a decent house in a decent area. Not a hope down under will the get a place on 3.5 times their earnings.

This is when they need the most help.

Its crazy even disputing this, when, we all know the Institutional LandLords blazed in un challenged to soak up the the very same properties that first time purchasers would have being looking at.

Some how I feel that race has been run. Its not working at present, change is needed, not restrictions.
 

Purple

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The problem with increasing the income to lending multiple is or course that the €320k house the prospective buyer is chasing will now cost €360k or €380k, but it's not a linear increase (see below). Increasing money supply just increases prices, it doesn't increase supply. The same people will be in the same place in the queue. The only difference will be that the same person who was going to buy the house anyway will have paid more for it.

The unintended consequence of all of this is that residential property has become more attractive and affordable for the cash buyer and large investor. That and the fact that there's no return on Bonds means that capital will keep flooding into the market so in that sense the existing lending multiples disadvantage anyone who is borrowing to buy a home. Given that 40% of homes are bought for cash the knock-on effect of increasing the lending multiple won't quite result in a corresponding increase in prices.
 

NoRegretsCoyote

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LS has pronounced.
Your argument rests on an assumption of complete inelasticity of supply, which is hardly plausible.

I agree 80%-90% of the issues are on the demand side. But the supply side can make a difference, and there is a good argument for moderate relaxation.

Even better than LTI would be debt-service-to-disposable-income. It would use net rather than gross income as denominator, and would look at all borrowings.
 

Purple

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Your argument rests on an assumption of complete inelasticity of supply, which is hardly plausible.

I agree 80%-90% of the issues are on the demand side. But the supply side can make a difference, and there is a good argument for moderate relaxation.

Even better than LTI would be debt-service-to-disposable-income. It would use net rather than gross income as denominator, and would look at all borrowings.
So if I'm earning €250k a year I should be able to borrow 4.5 times my income but someone earning €60k a year should be allowed to borrow 3.5 times, or less.
 

LS400

Registered User
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685
I wonder, are we alone on this issue within Europe.

I mean, we have had experts for years dictating whats best for first time borrowers, political parties have come and gone with the whole intention of settling the market, every new politician that has comes onboard the property train, has the latest answer.

Seriously, have we the brain power in this little Country to sort this madness out. I really don't think we have.

Restricting the amount we can borrow, will not help out this market, allowing limitless borrowing will not either. We need to change our outlook on our property needs.

First and foremost, we shouldn't need to have to own a Property. We should be able to rent a decent property in a decent area, for a decent price.

Start by shaking down the flippen abuse by Tenants on the property, ie, where your pps number follows you to the next unsuspecting property owner, and Haul that Slum Landlord over the hot coals for letting a hovel, and do it now, not wait 6 months and more, giving chance after chance.

When the pressure is off, reasonable decision making becomes a lot easier.
 

time to plan

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I think it would be OK to increase borrowing limits for borrowers prepared to fix for long time (10 years?) at an affordable repayment to income ratio.

PS I gave that 15 seconds thought, so am prepared to argue to the death on the Internet to defend it.
 
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