The Department of Finance has called on the Central Bank to substantially modify its mortgage lending rules to help first-time buyers and suggested that a failure to do so could worsen the housing crisis.

The proposals put forward by the department would see mortgage lenders given greater flexibility to breach lending limits set by the Central Bank, particularly for those seeking their first mortgages.

The Department of Finance also said banks should be encouraged to take into account high rents paid by would-be buyers to establish a capacity to repay, and called for the threshold at which first-time buyers are allowed to take out 90 per cent mortgages to be substantially increased.

Lending review

The Central Bank is reviewing mortgage lending rules brought in in February 2015 that some have blamed for exacerbating the housing crisis and leading to sluggish growth in home loans.

While the submission made by the department accepts there was a need for lending rules when they were imposed, it said problems in the house market had assumed a greater prominence in forming overall public policy.

It said there were “recognised difficulties faced by first- time buyers in accessing mortgage finance and this is placing pressure on the rental market”.

‘Capacity to pay’

In that context, the Department said it would be useful for the Central Bank to consider “capacity to pay” in any overhaul. It could take account of the fact that “many renters have demonstrated a strong rental payment record over a significant period of time”.

The submission pointed out that people renting have difficulty paying high rent and “concurrently saving for a mortgage down-payment” and it suggested it would be “most appropriate to provide for this through the allowances that permit lending activity in excess of the LTI [loan to income] and LTV [loan to value] thresholds”.

Under current rules, 15 per cent of a lender’s mortgages can be above a LTV cap of 80 per cent for second-time buyers and 90 per cent for first-time buyers while 20 per cent can breach an LTI rate set at 3.5 times annual salary.

The department suggested banks be allowed breach the LTV cap in up to 20 per cent of new loans and breach the LTI cap in up to 25 per cent of cases. It said the Central Bank should instruct banks to direct this increased allowance to first-time buyers.