Friday 24 November 2017

Insurer plans 'get around' for mortgage lending cap

Indemnity guarantee could help first-time buyers get on the ladder

Central Bank boss Philip Lane Photo: Collins Photo Agency
Central Bank boss Philip Lane Photo: Collins Photo Agency

Gavin McLoughlin and Sarah McCabe

Private insurers taking on a slice of mortgage risk could allow the Central Bank to relax its mortgage caps without storing up new problems in the banks, the financial regulator has been told.

Global insurance broker JLT says a mortgage indemnity guarantee (MIG) scheme to would allow mortgage banks to lend more and still cut their risk, as intended by mortgage lending caps introduced by the Central Bank last year.

Central Bank governor Philip Lane has been urged to consider bringing in the MIG scheme when the bank's review into its own mortgage lending limits is compele.

The current rules limit most buyers to borrowing 3.5 times their salary. First-time buyers need a 10pc deposit on houses up to €220,000 (and 20pc on the excess).

A MIG scheme would permit borrowers to get mortgages exceeding the cap - with the risk of default on the excess being borne by insurance providers, rather than banks or taxpayers.

JLT has written to Professor Lane, recommending that a large panel of private insurers be approached to provide the scheme.

"The effect of this approach would ensure that the diversification of counterparty risk is maximised. In addition, should any insurer fall below the required security level of the panel, they can be replaced without jeopardising the continuance of the MIG programme," the company wrote in its submission.

The Central Bank said that it is actively monitoring the impact of the mortgage caps.

"The key objective of these regulations was to increase the resilience of the banking and household sectors to the property market and to reduce the risk of bank credit and house price spirals from developing in the future," said a spokesman.

"As indicated at the outset, we continue to monitor the implemented measures on an ongoing basis."

Central Bank chief economist Gabriel Fagan recently said that it is "far too early to judge the effectiveness of the measures" taken last year.

However, many independent experts claim the caps are having a marked impact on mortgage approval rates and house prices in some areas, particularly Dublin.

The number of mortgages approved fell by 2pc in the three months to the end of last October, compared with the same period the year before. It was the first time mortgage approvals fell on a year-on-year basis since April 2013.

Before the rules were introduced, house prices in Dublin were shooting up at over 12pc per year - those increases are now beginning to reverse.

Sunday Indo Business

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