The Governor of the Central Bank has warned banks and building societies to stick to the agreed guidelines when issuing mortgages so that borrowers do not run into difficulties as a result of weakening economic conditions.
In a letter to the chairmen of 12 financial institutions, Mr John Hurley, stressed the need to maintain prudent lending practices and told them not to stray from the guidelines to win new customers.
"In light of the present uncertain economic environment, the bank is anxious that credit institutions should not relax their lending criteria in order to increase market share and that they alert their borrowers to the risks associated with all mortgage-based lending products."
The letter, seen by The Irish Times, notes the competitive pressures in the Irish property lending market and suggests this could undermine accurate risk assessment. This could result in financial institutions "misjudging" the ability of customers to repay those loans in more difficult times, according to the governor.
"It is imperative, that, at this time, high standards of discipline continue to be maintained, that all credit institutions remain fully alert to the dangers of lending to marginal borrowers and that lenders take full account of the economic cycle when making lending decisions," the letter states.
The governor adds that it is vitally important that customers should be made fully aware of the terms and conditions of the loans they have taken out. This is particularly important for individuals who have taken out equity release mortgages, borrowing money against the value of their home.
The letter refers to commercial and residential mortgage lending and was sent to AIB, ACC Bank, Bank of Ireland, Anglo Irish Bank, Bank of Scotland Ireland, EBS Building Society, First Active, Irish Life & Permanent, IIB Bank, Irish Nationwide Building Society, Ulster Bank, and National Irish Bank.
Mr Hurley has requested that the board of directors of these financial institutions should immediately review their lending policies and confirm to him that they are in line with the Central Bank guidelines.
These require banks and building societies to verify customers' income through either a P60 form or audited accounts where companies are seeking commercial mortgages. It advises that lenders should have a full picture of the total debts owed by potential mortgage customers, particularly where they are funding the balance of the purchase price.
Customers' applications should also be subjected to a stress test to determine whether they would be able to meet their monthly mortgage repayments if interest rates were to rise by up to 2 percentage points. Strict adherence to these guidelines could mean that some borrowers may find it extremely difficult to secure a mortgage.
The Central Bank last wrote to the financial institutions raising concerns about the growth in mortgage lending in July 2001. In the following months, official credit figures recorded a slowdown in the number of mortgages being advanced.
The bank's concerns were heightened in recent months as mortgage lending began to increase substantially. In September, the Central Bank recorded a 21.1 per cent rise in residential mortgage lending, the fastest increase since May 2001.
The return of investors and first-time buyers to the housing market in early 2002 have underpinned the surge in demand for new mortgages and have fuelled continuing increases in house prices. The Central Bank's primary concern is that unemployment may rise - placing mortgage-holders under enormous pressure to make repayments.
Yesterday, two financial institutions reduced mortgage interest rates in anticipation that the European Central Bank may decide to reduce its key rates in the near future. AIB reduced its fixed rate mortgages in some cases by as much as 0.5 per cent. The Irish Nationwide Building Society has cut its variable mortgage rate for new borrowers by 0.25 of a percentage point to 4.48 per cent.