The Bank of Ireland is preparing to make it more difficult for borrowers to obtain new mortgages as it tightens its affordability criteria in the context of rising interest rates and the cost of living.
The bank has told mortgage brokers that it continues to monitor new mortgage applicants’ ability to pay for potential rate increases that may occur over the life of a loan. He said the adjusted calculators that assess affordability will be active starting next Tuesday.
The Bank of Ireland did not tell brokers what changes it will make to its stress tests. The Central Bank already requires state lenders to stress test all new mortgage applications against the possibility of rates rising by 2 percentage points from their initial level.
A bank spokesman declined to comment on planned stricter home lending standards.
“Evaluating a loan application involves stress testing a number of scenarios to ensure the loan remains affordable if things change. This has always been a feature of mortgage appraisals and we keep it under continual review,” he said. “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 restrict new home loans to 2.5 times borrowers’ gross income, compared with the 3.5 times limit set by the central bank for most loans. First-time buyers approaching ICS for a mortgage are now required to put down a 20 percent deposit, while those moving in must provide 30 percent.
ICS also imposed a stipulation that potential borrowers must show that they will have €1,000 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. .
Finance Ireland decided last week to impose a similar type of buffer, but at a lower monthly level of €250 for new business, the sources said.
ICS and another non-bank lender, Avant Money, raised rates on certain mortgage products after the European Central Bank (ECB) raised its main rates by 0.5 percentage point in July. The expectation in the market is that retail banks will soon decide to increase the cost of their variable-rate and new fixed-rate loans, after the ECB raised rates by a record 0.75 points last week. AIB said on Wednesday that it will make a decision on rates within weeks.
The biggest concerns about credit risks come after banks spent more than a decade reducing delinquency levels. Debt-rating agency DBRS Morningstar highlighted in a report on Thursday that legacy mortgage problems “still persist in Ireland,” focusing on how some boom-era borrowers who took out interest-only mortgages have struggled in recent years. past few years to pay off or refinance. your outstanding balance as the loans come due.
Rising interest rates, macroeconomic constraints and macropolitical uncertainties may put further negative pressure on distressed borrowers in Ireland and reverse the positive trend of reduction in mortgage arrears achieved over the last decade. .
A Central Bank note published last month estimated that up to a third of low-income Irish mortgage holders could face financial difficulties trying to meet loan payments if recent levels of inflation continue. The document defined a homeowner as “at risk” of financial hardship when their residual income is less than 10 percent of their monthly mortgage payments, after meeting mortgage loan obligations and paying for essential non-housing items.
The economist estimates that, in a severe case of Irish inflation of 9.1% for 2022 as a whole, around 32% of mortgaged households in the lowest quarter income range would fall into the “at risk” category. That’s an increase from 26 percent before the recent inflation shock.