Lending loophole in Central Bank home loan rules

Irish banks can ignore the Central Bank’s tough new mortgage rules when they lend to customers abroad, the Irish Independent has learned.

Banks with UK operations, for example, can lend mortgages to their customers there without being bound by the home loan rules introduced by the Central Bank last year.
The Central Bank’s loan-to-income (LTI) and loan-to-value (LTV) measures were designed to boost not only the resilience of borrowers to another financial shock, but also protect the banking sector and stop a repeat of the loose lending that led to the crash.

The Bank of England has LTI restrictions in place, but unlike the Central Bank of Ireland, has made no policy recommendations regarding LTV.
Bank of Ireland, in particular, has a significant mortgage operation in the UK, with its UK mortgage book around the same value as its Irish one.

Bank of Ireland is the only Irish lender that still has large scale operations abroad. Other banks were forced to pull back from the British market in the wake of the crash, as well as other markets such as Poland where AIB had expanded during the period of the boom.
News that lending outside this State is not subject to the Regulator’s restrictions could prompt other banks struggling to lend cash in the Irish market to redirect capital abroad.

According to Bank of Ireland’s interim results published in recent weeks, Republic of Ireland mortgages total €24.6bn. The bank’s mortgage book in the United Kingdom totals roughly the same amount, at £20.5bn (€24.11bn).
It advertises to its Northern Ireland customers that first- time buyers can get mortgages of up to 90pc of the value of the price of a property, and up to 95pc on the UK Government’s Help to Buy scheme. Up to 90pc LTV is also offered for moving home. In the Republic, for first-time buyers, a limit of 90pc LTV applies on the first €220,000, reducing to 80pc on any value of the property thereafter.

But for non-first time buyers, a limit of 80pc LTV applies on new mortgage lending. A loan to income limit of 3.5 times earnings applies to all new home lending, and this should be exceeded by no more than 20pc of the value of all mortgages.
A Central Bank of Ireland spokeswoman said Irish banks operating in Britain fall under the UK regulator.

“In the UK, they would be subject to the Bank of England lending rules and requirements. It’s only the Republic of Ireland – the macroprudential rules only apply to that.”
In the UK, regulators recommend that lenders are prevented from allocating more than 15pc of new residential mortgages to individuals borrowing four and a half times their income, or greater. But a spokeswoman said there is no policy recommendations around loan to value. Stricter checks on mortgage applicants were introduced, though.

Bank of Ireland said that in the UK it had an average LTV of 62pc on existing stock and 69pc on new UK mortgages in the first half of the year. In Ireland, it has an average LTV of 74pc on existing stock and 71pc on new mortgages.
The issue of differing rules between the Central Bank and Bank of England was also noted at the June meeting of the so-called Principals Group, an interdepartmental gathering of senior Irish officials to discuss issues facing the economy.

According to the minutes, it was noted that an investigation of new Bank of Ireland lending in the UK had concluded.
“Bank of England permit higher LTV/LTI ratios than CBI,” the minutes stated.

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