Mortgage rule exemptions fall as Covid dents home lending

Exemptions to mortgage lending rules fell during the Covid-19 pandemic but there was no sign of a deterioration in borrower credit quality, according to a report from the Central Bank.

Just 13 per cent of new home lending by value was granted an exemption to rules on income multiples and home value in 2020, the regulator found, down from 17 per cent in 2019.

The rate of exemptions had been higher than 2019 in the first three months of the year, but there was a sudden drop in exemptions in April as the impact of the first Covid lockdown was felt.

The mortgage rules put in place by the Central Bank to ensure responsible lending by banks allow for exemptions against the 80 per cent loan to value threshold for up to 20 per cent of lending to existing homeowners. Only 5 per cent of lending to first-time buyers can exceed the permitted 09 per cent loan to value measure.

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In terms of loan to income – where the threshold is 3.5 times income – exemptions are allowed for 20 per cent of lending to first-time buyers and 10 per cent of existing homeowners.

The Central Bank report found that those receiving exemptions on the income multiple were most likely to be single applicants purchasing in Dublin. They were two to four years younger on average and tended to use a broker rather than directly dealing with the lender.

Dublin homes accounted for over 50 per cent of all exemptions, with a further quarter coming in the rest of Leinster.

First time buyers were noticeably less likely to be using an exemption if they were buying a secondhand property rather than a newly built home.

Purchase price

Among first-time buyers with an exemption on income multiples, the average purchase price of a home was €427,257, almost €50,000 ahead of the 378,796 paid by those with no exemption. The average first-time buyer with an exemption was 33 years old while those without exemptions tended to be two years older.

According to the Central Bank, the onset of the pandemic saw an “initial sharp fall” in new mortgage lending followed by a marked recovery towards the end of the year. A total of 35,233 loans were issued by seven lending institutions, with an aggregate value of €8.5 billion.

While overall home lending recovered in late 2020, the share of lending in receipt of an exemption to the rules did not experience the same recovery and ranged from 8-10 per cent of new mortgages between September and December.

“The allowances are limits and not targets and do not replace responsible lending standards and the application of suitability requirements by lenders,” said the report. It said the data on 2020 lending, which showed banks being less likely to offer exemptions than the previous year, did not point to “any significant deterioration in borrower credit quality since the pandemic”.