Mortgage cover plan 'could damage property market'
A MORTGAGE insurance scheme run by the State could damage the property market, the Central Bank has warned.
But the Government is still considering such a scheme.
The Government has floated the idea of an insurance scheme to make it easier to get mortgages, especially following the introduction of new mortgage lending caps.
There had been calls for such an insurance scheme to be introduced in order to lessen the impact of a 20pc mandatory deposit for first-time buyers for amounts borrowed over €220,000.
The Department of Finance said the Oireachtas Finance Committee had looked at the issue and had recommended that any further moves be delayed, to see how the new lending restrictions affect property buyers.
The Government committed to considering a mortgage insurance scheme in its housing plan Construction 2020, the department said.
No firm details have emerged on whether this would be a State scheme, or operated by a private insurance firm.
But yesterday a new academic paper from the Central Bank concluded that a mortgage insurance scheme could damage the property market, if it is run by the State.
It has warned that any State-backed insurance scheme could leave the Government footing major losses if there was another property price collapse.
And in an economic letter, the Central Bank said the property market could be destabilised if a single insurer was forced to make large pay-outs after mass mortgage defaults.
Under such schemes in other countries, an insurance product covers 10pc of the value of the loan while the buyer comes up with another 10pc.
This would mean new buyers would be able to get mortgage approval with a 10pc deposit instead of the full 20pc.
However, this insurance is an extra cost for the borrower, and protects the bank in the event the property is repossessed.
The cost of the insurance could be between €1,000 and €5,000 on a €200,000 mortgage, which would be added to the amount borrowed, the Central Bank research indicated.
Central Bank senior economist Niamh Halissey concluded that there was some merit in a new mortgage insurance scheme.
But this type of product would not remove the risk of a systemic crisis. Instead, it shifts this risk from the lenders to the insurers.
Ms Halissey wrote: "If this risk is concentrated in a small number of mortgage insurers, or in a State-owned insurer, this could increase the systemic problems in the underlying market.
"This is particularly the case where the insurers are domestic, and the risk and accompanying liability remains within the State."
A mortgage insurance product would have to be accompanied by a robust prudential supervisions, which would take time to put in place.
"If the cost of such insurance was to be very large, it would likely be capitalised onto the mortgage principal and would increase household indebtedness," the letter stated.