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Strict mortgage limits in bid to rein in housing bubble

The Central Bank is set to rein-in the lending powers of financial institutions to stop the property market overheating and prevent a dangerous price bubble from getting out of control.

Strict limits on the amount that banks can lend to home buyers are set to be unveiled today which could mean house buyers will need to have 20pc of the price saved before being able to get a mortgage.


A ceiling will also be put on lending at three or four times the combined income of the borrowers.

Central Bank governor Patrick Honohan has warned that banks are charging so much for new mortgages they are at risk of "overpricing".

In a wide-ranging speech at University College Dublin, Mr Honohan said it was time the Central Bank introduced measures to limit the amount that banks can lend to customers looking to buy property in a rising market.

He said it was "hard to deny" that a cap of some kind would stop a similar bubble to that experienced during the Celtic Tiger years.

He added that banks had misjudged risk in the past, which meant it was not unreasonable to have constraints on borrowing to avoid a "credit-driven bubble".


"Even in the absence of a credit-driven bubble, there is much to be said for bringing back some rules of this type now that the property market has stopped falling and has indeed turned around with a bit of a bang in Dublin," he said.

The measures - to be imposed on new mortgages - could be in place by the start of next year.

It comes as the latest house price figures showed a rise of 25pc on average in Dublin over the past year, although they still remain well below their 2007 peak.

Mr Honohan also urged the Government to act carefully and not squander the growth that the country is currently experiencing.

"It is very important for us that they bring in a good solid Budget ... not to splash it out in 2015," he said.

Mr Honohan also acknowledged that variable mortgage rates were high. But he dismissed calls to control the interest rates lenders can impose on borrowers.

He said expensive mortgages would attract new lenders into the market, which would force rates down.

"That would be very welcome and would have the effect of bringing both pricing and the quality of banking services to a much better place," he said.