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Mortgage borrowers at the loan-to-income limit

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  • Gaffney, Edward

    (Central Bank of Ireland)

Abstract

I show that lenders respond to Ireland’s macroprudential mortgage measures by reducing lending and leverage to households seeking high loan-to-income ratios. Applying a bunching estimator to supervisory mortgage records in Ireland, it is shown that at least one in eight owner-occupier borrowers in 2018 took on less debt than they would have if there were no loan-to-income limit. The total reduction is at least one-half of one per cent of all new mortgage lending. Households at the limit earn less than other borrowers and are more likely to be single-income, two characteristics that have been associated historically with higher credit risk. These households reduce leverage by committing more gifts and non-earned deposits than other borrowers. The results suggest that due to the loan-to-income regulation, households with high credit-risk characteristics tend to borrow less, easing their burdens of leverage and debt service.

Suggested Citation

  • Gaffney, Edward, 2019. "Mortgage borrowers at the loan-to-income limit," Financial Stability Notes 11/FS/19, Central Bank of Ireland.
    • Handle: RePEc:cbi:fsnote:11/fs/19
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    References listed on IDEAS

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    1. Michael Carlos Best & James S Cloyne & Ethan Ilzetzki & Henrik J Kleven, 2020. "Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(2), pages 656-690.
    2. Gaffney, Edward, 2018. "Residential property price segments and mortgage finance," Financial Stability Notes 11-18, Central Bank of Ireland.
    3. McCarthy, Yvonne & McQuinn, Kieran, 2017. "Credit conditions in a boom and bust property market: Insights for macro-prudential policy," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 171-182.
    4. 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.
    5. Anthony A. DeFusco & Andrew Paciorek, 2017. "The Interest Rate Elasticity of Mortgage Demand: Evidence from Bunching at the Conforming Loan Limit," American Economic Journal: Economic Policy, American Economic Association, vol. 9(1), pages 210-240, February.
    6. Kinghan, Christina, 2018. "Macroprudential Measures and Irish Mortgage Lending: Insights from H1 2018," Financial Stability Notes 8/FS/18, Central Bank of Ireland.
    7. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1449-1496.
    8. Kinghan, Christina & Lyons, Paul & Mazza, Elena, 2018. "Macroprudential Measures and Irish Mortgage Lending: An Overview of 2017," Financial Stability Notes 1/FS/18, Central Bank of Ireland.
    9. Kinghan, Christina, 2018. "Macroprudential Measures and Irish Mortgage Lending: Insights from H1 2018," Financial Stability Notes 08-18, Central Bank of Ireland.
    10. Kinghan, Christina & Lyons, Paul & Mazza, Elena, 2018. "Macroprudential Measures and Irish Mortgage Lending: An Overview of 2017," Financial Stability Notes 01-18, Central Bank of Ireland.
    11. Gaffney, Edward, 2018. "Residential property price segments and mortgage finance," Financial Stability Notes 11/FS/18, Central Bank of Ireland.
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    Cited by:

    1. Conor O'Toole & Rachel Slaymaker, 2022. "Back to the Future? Macroprudential Policy and the Rebirth of Local Authority Mortgages in Ireland," The Economic and Social Review, Economic and Social Studies, vol. 53(4), pages 223-260.
    2. McCann, Fergal & Durante, Elena, 2022. "The effects of a macroprudential loosening: the importance of borrowers’ choices," Research Technical Papers 9/RT/22, Central Bank of Ireland.
    3. McQuinn, Kieran & O’Toole, Conor & Slaymaker, Rachel, 2021. "Credit access, macroprudential rules and policy interventions: Lessons for potential first time buyers," Journal of Policy Modeling, Elsevier, vol. 43(5), pages 944-963.
    4. Gaffney, Edward, 2022. "Loan-to-income limits and mortgage lending outcomes," Financial Stability Notes 10/FS/22, Central Bank of Ireland.

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