Home loan limits will lead to ‘prudent lending’ and cut default risk, says Fitch

The Central Bank’s proposed restrictions on new mortgages will lead to fewer borrowers defaulting on their home loans, according to analysts at a multinational agency that specialises in assessing credit risk.

The Central Bank plans to impose new limits on mortgages from next year requiring a deposit of 20 per cent of the purchase price and that loans do not exceed 3.5 times the borrower's income. In a paper published yesterday, ratings agency Fitch says that the loan-to-income and loan-to-value limits that the financial watchdog plans to introduce would "in the long-term reduce the credit risk in the Irish residential mortgage lending market through more prudent lending".

Analysts Stephen Kemmy and Ketan Thaker point out that where mortgages amount to more than 83 per cent of the property's purchase price and to more than 3.5 times the borrower's income, the rate of foreclosure – default – increases.

Central Bank figures show that 44 per cent of new home lending last year involved loans of more than 80 per cent of the property’s value, while 23 per cent were worth more than 3.5 times the borrower’s earnings.

Fitch Ratings measures businesses’ and organisations’ ability to repay their debts. It is one of three agencies that rate bonds issued by Irish banks that are tied to mortgages loaned out during the property bubble.