Andrew Doyle (Wicklow, Fine Gael) | Oireachtas source

As the House is aware, yesterday the Central Bank announced amendments to the macro-prudential regulations for residential mortgage lending. These changes will take effect from the start of next year. The Central Bank has an independent mandate to protect the stability of the Irish financial system and it first introduced the macro-prudential lending regulations in February 2015.

These regulations were the first such controls on lending in Ireland and they applied proportionate loan-to-value, LTV, and loan-to-income, LTI, limits to mortgage lending by regulated financial service providers in the Irish market. Under these regulations a borrower was subject to a general maximum loan-to-value limit of 80% of the value of a primary home property. However, the regulations also allowed for a higher 90% threshold for first-time buyers in respect of the value of a property up to an amount of €220,000 and for an 80% threshold for any value in excess of that amount. The rules also applied an LTI restriction of 3.5 times annual income. The regulations did allow a certain flexibility to banks to exceed both the LTV and LTI thresholds by up to 15% and 20% respectively in regards to each individual bank's overall primary home mortgage lending in any year.

When they were introduced, the Central Bank made clear that these controls on mortgage lending were designed to be a permanent feature of the Irish financial system. However, the Bank also committed itself to keeping the particular measures under review to ensure they are appropriately calibrated to evolving financial and economic circumstances.

For this reason, the Central Bank began its first review of the regulations earlier this year. As part of that process, the bank initiated a call for evidence based submissions. In total, it received approximately 50 external submissions as part of the review process. Yesterday, the Central Bank announced the results of this review process and confirmed that some small adjustments would be made to the regulations.

The key changes will mainly apply to first-time buyers, for whom the LTV limit of 90% will now apply to the entire value of a property rather than the first €220,000 of a mortgage loan as is currently the case. Also, the flexibility to banks to lend above the LTV limits is being adjusted. Mortgage lenders will now be able to lend up to 5% of their overall lending to first-time buyers at above the 90% LTV limit; in respect of second subsequent buyers, lenders can allow 20% of their overall mortgage loan book to exceed the 80% LTV restriction that applies to such lenders. Currently, the overall limit is 15%.

There are two other changes to the regulations, namely, the removal of large commercial borrowers from the scope of the regulations and allowing property valuations to be carried out up to four months before a loan is provided. Valuations were required to be carried out within two months of a loan being provided and this had caused some problems at the closing of some sales. More flexibility is now available at the key point in a sales transaction. Nevertheless, it should be noted that no change has been made to the LTI restrictions of 3.5 times annual income or to the exemption allowance of 20% of a lender's overall mortgage loan book.

This macro-prudential regulatory framework is designed to avoid spiral dynamics between house prices and credit volumes. This system should allow for consumers to purchase their own homes while protecting against any significant surge in property prices and preventing imprudent lending on the part of the banks. The Central Bank indicated that since the mortgage measures were initially flagged in late 2014, there has been a sharp moderation in expectations for annual gains in house prices. This is because it is widely understood that persistently high rates of increase in house prices are not likely in a system in which measures place ceilings on LTI and LTV lending ratios. Moreover, the Central Bank has indicated that the regulations will be kept under constant review and can be tightened if there is emerging evidence of elevated risks in the mortgage market.

As indicated, these refinements of the macro-prudential regulations will take effect from January 2017. From the Government's point of view, they are a prudent but welcome development that will make it a little easier for people to secure a mortgage. In particular, when taken in conjunction with the help-to-buy scheme, they should assist first-time buyers who are struggling to save the deposits required to purchase homes.

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