In 2015, the Central Bank of Ireland (“CBI”) introduced mortgage measures with the objective of strengthening the resilience of borrowers, lenders, and the economy overall. These mortgage measures use Loan-to-Value (“LTV”) and Loan-to-Income (“LTI”) limits to place an outer boundary on the size of borrowers’ mortgage debt used to purchase residential properties.
The CBI conducts an annual review of these mortgage measures to ensure they remain fit for purpose. In this regard, the outcome of the most recent Consultation on the Mortgage Measures Framework Review (“CP146”) was published by the CBI on 19 October 2022 when they announced several changes to the mortgage measures.
The changes to these measures come into effect on 1 January 2023.
Key outcomes of the review
The following provides a summary of the outcome of the CBI review of the Mortgage Measures Framework:
1. The LTI and LTV limits
The CBI is retaining the dual instrument (LTI and LTV limits) approach. Notably, whilst The CBI proposed that either Debt to Income (“DTI”) or Debt Service to Income (“DSTI”) could replace LTI as the income-based limit, this change was not forthcoming. LTI will remain the income-based instrument as it is more comprehensive, easier to understand and less susceptible to risk than DTI or DSTI limits. Loan-to-Value (“LTV”) will remain as the collateral-based instrument.
The LTI limit will continue to set a limit on the amount of money consumers can borrow relative to their gross income and the LTV limit will continue to set a minimum deposit amount needed by borrowers to complete the purchase of a residential property.
The dual approach remains unchanged; however, the CBI has introduced LTI and LTV limit differentials based on borrower type.
2. First Time Buyer definition
The definition of First Time Buyer (“FTB”) is being amended to allow FTBs who are obtaining an equity release / top-up on their home to avail of the FTB limits, provided the property remains their primary residence. Borrowers facing a change in circumstances (e.g., divorce or personal insolvency) will also be considered FTBs when taking out a new mortgage where they no longer have an interest in the previous property.
3. First Time Buyer mortgage measures
The LTI limit for all FTBs is changing from 3.5 times to up to 4 times gross income. The minimum deposit requirement will remain unchanged, noting the LTV limit for FTB’s will stay at 90%.
4. Second and Subsequent Buyer mortgage measures
The LTI limit for Second and Subsequent Buyers (“SSB”) remains unchanged at 3.5 times gross income. However, the LTV limit for SSBs is changing, with an increase from 80% to 90%. This will set the new minimum deposit amount required by SSBs to complete the purchase of a residential property.
5. Buy to Let Buyer mortgage measures
No changes were made to the mortgage measures for Buy to Let (“BLT”) borrowers where a 70% LTV limit will continue to apply.
6. Allowances in overall Mortgage Measures Framework
Acknowledging the change in the FTB LTI limit and SSB LTV limit, the proportion of lending above the revised LTI and LTV limits will now apply at the level of the borrower type rather than the individual limit. In this regard, 15% of FTB lending, 15% of SSB lending and 10% of BTL lending can take place above the revised LTI and LTV limits for each borrower type
What does this mean for lenders?
The changes in mortgage measures announced by the CBI should theoretically increase the opportunity base for lenders particularly as additional housing stock becomes available. However, the timing of these changes is not without challenge noting current macro-economic conditions and the short lead in time before the changes become effective. This creates an additional layer of potential complexity for lenders in reviewing and revising their own mortgage lending practices.
Acknowledging the foregoing, lenders should consider the following:
- The development of a revised mortgage measures “playbook” used by lenders to re-evaluate their resiliency across all aspects of risk.
- Potential changes to business strategy / plan and credit risk appetite, considering the revised mortgage measures that includes a phased implementation plan for instituting any such change in approach.
- Integration implications for any recent residential mortgage portfolio acquisitions.
- The revised mortgage measures should not replace lenders’ own lending standards. Instead, suitability and affordability should remain the key guiding principles, with any adjustment in lending standards informed by advanced data analytics that considers portfolio performance over time.
- Any changes in credit risk appetite should be targeted by borrower type and underpinned by a prudent credit assessment to avoid the origination of future potential non-performing loans (“NPL”).
- Enhancements or adjustments to the calibration of existing credit risk models or credit scoring methodologies and the availability of automated credit decisioning for borrowers, based on the revised mortgage measures.
- Downstream implications for end-to-end credit journey transformation, such as increased regulatory reporting requirements to monitor the impact of the revised mortgage measures.
- Adjustments to LTI and LTV mortgage calculators, in particular, for online customer portals.
- Change in policies, processes and procedures to reflect the changes in mortgage measures. Notably, to reflect the changes to the FTB definition, lenders must consider if they need to update their FTB lending policy and train frontline staff on the updated scope of FTB status.
- The use of proportionate allowances will remain at the lender’s discretion, but it is important for lenders to consider what updates to lending policies, processes, procedures or systems and reporting are required to ensure alignment with the changes in mortgage measures.
- Staff training may also be required to ensure adherence to updated firm policies and to ensure a full understanding of the revised
How KPMG can help
KPMG provide risk and regulatory advice, proposition / product design and programme support services across the financial services sector. We have extensive experience in guiding businesses through regulatory change and designing and implementing your operating policies, procedures, and systems to align to the requirements. Examples of how our team of experts can assist include:
- Support you in establishing a programme of work to address the changes required that could impact both product and system functionality.
- Support you in re-evaluating your business strategy / plan and credit risk strategy informed by subject matter expertise and international insights.
- Support you in identifying, designing and implementation end-to-end credit journey enhancements.
- Assist you with a lending policy gap analysis to assess your current operational readiness. Facilitating the assessment of how the mortgage measure changes may impact your business processes, including any technology impact.
- Assist you with testing of the changes to ensure that they are adequately designed pre-implementation and have been applied post -implementation; and
- Support you in training your staff following the changes to mortgage measure definitions, allowances and limits through a variety of training techniques.
Next steps
The mortgage measures will be permanent in nature and any proposed changes will be driven by structural developments. The CBI will undertake regular monitoring and will report biannually in the Financial Stability Review.
Get in touch
If you have any queries on these new mortgage measures, please contact Stephen Bradley-Brophy of our Risk team. We'd be delighted to hear from you.
Stephen Bradley-Brophy
Associate Director
KPMG in Ireland
Niamh Lambe
Managing Director, Risk and Regulatory Consulting
KPMG in Ireland
