Mortgages to stay expensive as Celtic Tiger losses keep piling up

85 pc of recent mortgage defaults are on loans that originated before 2009

Bigger-than-average losses on old loans remain a problem for the banks

Jon Ihle

Irish borrowers won’t get continental style cheap mortgages until the hangover of bad home loans from the crash has been worked through, new research from the Central Bank suggests.

The research found that persistently high levels of default and losses on mortgages written during the Celtic Tiger mean that Irish banks must maintain higher levels of regulatory capital than their European peers.

The cost of that extra capital continues to filter down into the rates charged on mortgages issued today, despite an improvement in the riskiness of new lending.

According to the note, 85 pc of recent mortgage defaults are on loans that originated before 2009 , which means the poor lending standards from more than a decade ago still affect pricing on loans today.

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The impact of that bad lending is declining, however, as a strong economy, better underwriting and strict mortgage lending rules have helped improve the quality of loan books.

As those better loans gradually replace the poor quality legacy mortgages, the risk weighting at Irish banks is expected to converge with European norms.

In the meantime, however, bigger-than-average losses on those old loans remain a problem for the banks.

The Central Bank said expected loss on defaults was still high in Ireland because of the long workout period for bad loans, which the report’s authors said was due to the length of time it takes to repossess homes and the sheer volume of bad debts to work through.

Meanwhile, members of the public and stakeholders have three more weeks to make their views known to the Central Bank on mortgage-lending restrictions that limit most loans to just 3.5 times a borrower’s income.

Regulators are looking for input on whether limiting loans based on incomes and property values is the most effective approach or whether other measures might work better.

Among the ideas being considered are limiting loan amounts based on ability to service debt and taking rent payments into consideration, weighing loans against net rather than gross income, and allowing a higher borrowing ratio for those earning less than €60,000.

The consultation runs until March 16, 2022 after which the Central Bank will produce a report outlining its conclusions in the second half of the year.

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