The Bank of Ireland is preparing to make it more difficult for borrowers to secure new home loans as it tightens affordability standards against a backdrop of rising interest rates and cost of living.
The bank told mortgage brokers that it continues to monitor the repayment capacity of new mortgage applicants against potential rate increases that may occur over the life of the loan. She said modified calculators for assessing affordability will start next Tuesday.
The Bank of Ireland has not indicated to brokers what changes it will make to stress tests. The central bank is already asking the country’s lenders to stress-test all new mortgage applications against the possibility of raising interest rates by two percentage points from their initial level.
A spokesman for the bank declined to comment on the planned tougher mortgage lending standards.
“Loan application assessment involves stress testing across a number of scenarios to ensure that the loan remains affordable if things change. This has always been a feature of mortgage appraisals and we keep it under constant review.” This is to ensure that potential new clients are protected from potential shocks under the current economic environment.
This development comes on the heels of recent moves by two non-bank lenders to tighten affordability standards. ICS Mortgages decided last month to temporarily limit new home loans to borrowers’ gross income at 2.5 times, compared to the 3.5 times the central bank’s limit set for most loans. First-time buyers approaching ICS for a mortgage must have a 20 percent deposit, while carriers must provide 30 percent.
The ICS has also imposed a requirement that potential borrowers must prove they have 1,000 euros at the end of each month, after monthly living expenses and mortgage payments at current rates, to secure a new home loan, according to the sources.
Ireland’s finance agency decided last week to impose a similar type of reserve, but at a lower monthly level of €250 for new businesses, sources said.
ICS and another non-bank lender, Avant Money, raised interest rates on some mortgage products after the European Central Bank raised key interest rates by 0.5 percentage point in July. Market expectations are that retail banks will soon decide to increase the cost of their new variable and fixed-rate loans, after the European Central Bank last week raised interest rates by 0.75 points. AIB said on Wednesday it would make a decision on rates within weeks.
Rising concerns about lending risks come after banks have spent more than a decade bringing down troubled levels. Debt rating agency DBRS Morningstar highlighted in a report on Thursday that old mortgage issues were “still continuing in Ireland” as it focused on how some boom-era borrowers who took out interest-only mortgages in recent years have struggled to repay or refinance. The balance outstanding at the maturity of the loans.
The report warned that “rising interest rates, macroeconomic constraints and macro-political uncertainties may put further negative pressures on distressed borrowers in Ireland and reverse the positive trend of reducing mortgage arrears achieved over the past decade.”
A central bank note published last month estimated that as many as a third of low-income Irish mortgage holders could face financial hardship trying to make loan payments if recent inflation levels are maintained. The paper identified a homeowner as “at risk” of financial distress when his residual income is less than 10 percent of his monthly mortgage payments, after meeting the home’s loan obligations and paying for essential non-housing items.
The economist estimates that in a severe case of Irish inflation of 9.1 percent for 2022 as a whole, about 32 percent of foreclosed households in the bottom quartile’s income range would fall into the “at risk” category. That is up from 26 per cent before the recent inflation shock.