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Bank call for limits on mortgages
01 Oct 2014 21:09
The Central Bank has said formal limits should be considered on the amount of money people can borrow to buy houses.
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In a research note, Central Bank economists say banks should not lend more than 80% of the value of a property, and that borrowers should not get a mortgage of more than four times their income.
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This would makes both banks and households more resilient in market downturns, according to the research.
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It found mortgages with high loan-to-value and loan-to-income ratios issued in 2007 were the most likely to run into trouble with repayments and suffer negative equity.
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The Central Bank is likely to publish a consultation paper next week calling for submissions on the feasibility of introducing binding measures to restrict loans.
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The CBI notes the Basel Committee on Bank Supervison regards 80% loan-to-value ratios as high.
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Imposing a cap on loan-to-value ratios imposes a minimum down payment level on prospective purchasers.
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Limits on loan-to-income ratios constrain the ability of households to borrow at unsustainable levels.
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The Central Bank said capping both ratios would act counter-cyclically by constraining borrowing, directly reducing credit demand and containing unsustainable increases in household debt.
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It notes Bank of England research that says such caps do not target house price growth, though it says there is some evidence that they may act to impede such growth.
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LTV and LTI limits have been introduced in Norway, Sweden Finland, New Zealand, Hong Kong and in a limited way in the UK.
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