By | September 16, 2022
Bank of Ireland will tighten criteria for home loans with rising interest rates

Bank of Ireland is preparing to make it harder for borrowers to secure new mortgages as it tightens its affordability criteria in the face of rising interest rates and the cost of living.

The bank has told mortgage brokers that it continues to monitor the repayment capacity of new mortgage applicants against potential rate rises that could occur over the life of a loan. It said adjusted calculators assessing affordability will be live from next Tuesday.

Bank of Ireland did not indicate to brokers what changes it will make to its stress tests. Lenders in the state are already required by the central bank to stress test all new mortgage applications against the possibility of interest rates increasing by 2 percentage points from their starting level.

A spokesman for the bank declined to comment on the planned tightening of mortgage lending standards.

“Assessing a loan application involves stress testing a number of scenarios to ensure the loan is still affordable if things change. This has always been part of mortgage assessments and we keep it under constant review,” he says. “This is to ensure that potential new customers are protected against potential shocks given the current economic environment.”

The development follows recent moves by two non-bank lenders to tighten affordability criteria. ICS Mortgages decided last month to temporarily limit new home loans to 2.5 times borrowers’ gross income, compared to the 3.5 times limit set by the central bank for most loans. First-time buyers approaching ICS to get a mortgage now need a 20 per cent deposit, while movers must provide 30 per cent.

The ICS also introduced a provision that prospective borrowers must show they will have €1,000 at the end of each month, after monthly living expenses and mortgage payments at current interest rates, to secure a new home loan, according to sources.

Finance Ireland decided last week to introduce a similar type of buffer, but at a lower monthly level of €250 for new business, sources said.

ICS and another non-bank lender, Avant Money, raised rates on some mortgage products after the European Central Bank (ECB) raised its key interest rates by 0.5 percentage points in July. Market expectations are that retail banks will soon decide to raise the cost of their floating and new fixed-rate loans, after the ECB raised interest rates by a record 0.75 basis points last week. AIB said on Wednesday it will make a decision on rates within weeks.

Increased concern about lending risks comes after banks spent more than a decade trying to lower non-performing loans. Ratings agency DBRS Morningstar highlighted in a report on Thursday that legacy mortgage issues “remain persistent in Ireland” as it focused on how some boom-time borrowers who took out interest-free mortgages have struggled in recent years to repay or refinance their outstanding balances when the loans mature .

“Rising interest rates, macroeconomic constraints and macro policy uncertainty could put further negative pressure on distressed borrowers in Ireland and reverse the positive trend of reducing mortgage backlogs achieved over the past decade,” it warned.

A central bank note published last month estimated that up to a third of Irish mortgage holders on lower incomes could face financial distress as they try to meet loan repayments if recent levels of inflation are maintained. The paper defined a homeowner as “at risk” of financial distress when their residual income is less than 10 percent of their monthly mortgage payments, after meeting mortgage obligations and paying for essential non-home items.

The economist estimates that in a severe case of Irish inflation reaching 9.1 per cent for 2022 as a whole, around 32 per cent of mortgaged households in the lowest quarter’s income bracket would fall into the ‘risk’ category. That’s up from 26 percent before the last inflation shock.

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