In Ireland, the mortgage measures that have been set by the Central Bank of Ireland function as lending rules that lenders and borrowers must adhere to during mortgage transactions.
These measures were created to ensure that banks and other lenders would lend out money sensibly. Additionally, these measures were created to prevent the buildup of significant, unaffordable debt and excess credit in the Irish Financial System. Therefore, these mortgage measures function to ensure the financial stability and the long-term resilience of the nation’s financial and monetary system.
Why Were These Measures Created?
The mortgage measures were introduced by the Central Bank of Ireland early in the economic cycle in 2015. The introduction of these measures came at a time when the housing market was recovering following the financial crisis.
The severe cycle of growth and collapse that occurred saw housing prices fall considerably over time. At the introduction of the measures in 2015, the economy was beginning to recover from the financial crisis and this period was marked by significant imbalances in the housing market. For example, national housing prices increased by about 15% annually with Dublin housing prices increasing 25%. These imbalances were largely due to housing supply shortages.
Mortgage Measures Summary
The mortgage measures were specifically designed to increase the resiliency of lenders and borrowers to adverse events, and to ensure that housing prices and credit would not react to unfavorable pro-cyclicality.
The mortgage measures include two limits: Loan-to-Value and Loan-to-Income limits. The Loan-to-Value limit determines the deposit needed for a loan and is based on the buyer category that a borrower fits under. First-time buyers must have a 10% minimum deposit, second and subsequent buyers must have a 20% minimum deposit, and buy-to-let buyers must have a 30% minimum deposit. Lenders can lend above these amounts, but such exemptions are also regulated by the Central Bank.
The Loan-to-Income limit determines how much you can borrow, and it is dependent on your income. This limit restricts the loan that a borrower can take out to 3.5 times their gross annual income.
Each year, the Central Bank of Ireland reviews these mortgage measures and determines if and how they need to be adjusted.
Mortgage Measures Outside of Ireland
Ireland is not the only country with mortgage measures, but rather mortgage measures are used regularly around the globe. In general, these measures impose limits on the amount of credit that can be extended to borrowers based on property value, borrower income, or borrower creditworthiness.
The mortgage measures established by the Central Bank of Ireland are intended to protect borrowers and lenders, as well as the Irish Financial System as a whole.