The Central Bank has today left its key rules on mortgage lending unchanged and also extended its relaxation of certain regulations on bank reserves into next year.
However, the Governor of the Central Bank warned the situation facing the economy is still “very challenging” with “heightened uncertainty” over the implications of higher corporate and sovereign debt levels.
In its latest Financial Stability Review, the Central Bank lays out the case that its mortgage rules have helped improve the ability of both borrowers and lenders to withstand shocks like Covid-19.
It noted that mortgages which began in the 2010s and would have come under the current rules were less likely to have availed of payment breaks during the pandemic.
The current Central Bank rules restrict the loan to value limits on a mortgage to between 70% and 90% of the value of a property and varies depending on whether the borrower is a first time buyer or some trading up.
The loan to income rule is three and a half times salary, but there is some leeway for banks to go above these limits.
The Central Bank has noted a recent recovery in mortgage demand, but overall in the year to October mortgage lending is down 18% over the same period last year.
The bank said it believes the fallout from the pandemic is the main driver of what is happening in the market.
Central Bank Governor Gabriel Makhlouf said bad debts have begun to appear across households and businesses and he warned that the shock from Covid-19 “hasn’t played out completely.”
The Central Bank also announced that its Counter-Cyclical Capital Buffer will remain at 0% into next year.
This means banks can continue to use some of their financial resources to support lending rather than keeping them back as a reserve in the Central Bank.
Today’s report also points out that the failure to agree a Brexit trade deal remains the biggest risk to the economy and financial system.
It warns that it has the potential to amplify the risks which are already there due to the pandemic, adding that some Irish banks have significant exposure to the UK.
The Central Bank also warns that the commercial property sector is particularly exposed to the shock from Covid and the potential for a structural shift due to changes in how people work.
But overall, the Central Bank believes the banking sector here is in better shape to withstand what could be an uneven recovery next year.