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Loan-to-income limits and mortgage lending outcomes

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  • Gaffney, Edward

    (Central Bank of Ireland)

Abstract

In this Note, I describe a model of mortgage home loan lending in Ireland, focusing on estimates of the loan-to-income (LTI) ratio distribution of new lending under different macroprudential policy calibrations. The model can be used to estimate responses by borrowers and lenders to the calibration of the Central Bank of Ireland’s mortgage measures, which control shares of lending extended at high loan-to-income ratios to owner-occupiers. It covers three responses to an increase in the limits: leveraging among borrowers willing and able to access larger credit amounts, a plausible change in residential property prices in response to credit availability, and the possibility that new borrowers participate in the market. Under the revised calibration of the mortgage measures, and assuming that broader credit conditions remain comparable to the early 2020s, raising the first-time buyer LTI limit from 3.5 to 4 would increase average LTI ratios from 2.95 to 3.20 in the medium term.

Suggested Citation

  • Gaffney, Edward, 2022. "Loan-to-income limits and mortgage lending outcomes," Financial Stability Notes 10/FS/22, Central Bank of Ireland.
    • Handle: RePEc:cbi:fsnote:10/fs/22
    as

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    File URL: https://www.centralbank.ie/docs/default-source/publications/financial-stability-notes/loan-to-income-limits-and-mortgage-lending-outcomes.pdf?sfvrsn=8602951d_10
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    References listed on IDEAS

    as
    1. Gaffney, Edward, 2019. "Mortgage borrowers at the loan-to-income limit," Financial Stability Notes 11/FS/19, Central Bank of Ireland.
    2. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2016. "The great mortgaging: housing finance, crises and business cycles," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 31(85), pages 107-152.
    3. Henrik J. Kleven & Mazhar Waseem, 2013. "Using Notches to Uncover Optimization Frictions and Structural Elasticities: Theory and Evidence from Pakistan," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(2), pages 669-723.
    4. Mark Cassidy & Niamh Hallissey, 2016. "The Introduction of Macroprudential Measures for the Irish Mortgage Market," The Economic and Social Review, Economic and Social Studies, vol. 47(2), pages 271-297.
    5. Crowe, Christopher & Dell’Ariccia, Giovanni & Igan, Deniz & Rabanal, Pau, 2013. "How to deal with real estate booms: Lessons from country experiences," Journal of Financial Stability, Elsevier, vol. 9(3), pages 300-319.
    6. Arigoni, Filippo & McCann, Fergal & Yao, Fang, 2022. "Mortgage credit and house prices: evidence to inform macroprudential policy," Financial Stability Notes 11/FS/22, Central Bank of Ireland.
    7. Ruben H.G.M. Cox & Remco C.J. Zwinkels, 2019. "Mortgage Insurance Adoption in the Netherlands," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 47(4), pages 977-1012, December.
    8. Kennedy, Gerard & McIndoe-Calder, Tara, 2012. "The Irish Mortgage Market: Stylised Facts, Negative Equity and Arrears," Quarterly Bulletin Articles, Central Bank of Ireland, pages 85-108, February.
    9. Aikman, David & Kelly, Robert & McCann, Fergal & Yao, Fang, 2021. "The macroeconomic channels of macroprudential mortgage policies," Financial Stability Notes 11/FS/21, Central Bank of Ireland.
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