The Central Bank has said the introduction of a mortgage insurance scheme for first time buyers would reduce the effectiveness of the loan to value cap introduced by the bank recently.
There had been calls for such an insurance scheme to be introduced in order to lessen the impact of a 20% mandatory deposit for first time buyers.
Under such schemes in other countries, an insurance product covers 10% of the value of the loan while the buyer comes up with another 10%.
In an economic letter published today, the Central Bank acknowledged that there was merit in a mortgage insurance scheme in that it would alleviate the liquidity constraints associated with a loan to value cap.
However, it said such a product would not remove the risk of a systemic crisis, but shifts this risk from the lenders to the insurers.
"If this risk is concentrated in a small number of mortgage insurers, or in a State-owned insurer, this could increase the systemic problems in the underlying market. This is particularly the case where the insurers are domestic, and the risk and accompanying liability remains within the State," the letter said.
It added that a mortgage insurance product would have to be accompanied by a robust prudential framework for the supervision of these companies which would take time to put in place.
The Central Bank also pointed to consumer protection issues that would arise from the introduction of such products and to the costs associated.
"If the cost of such insurance was to be very large, it would likely be capitalised onto the mortgage principal and would increase household indebtedness," the letter stated.
The Bank opted in the end for a tiered structure that would enable banks to lend up to 90% of the value of a home to first-time buyers up to a limit of €220,000 with an 80% loan to value cap applying to amounts over that.
