Loan-to-income limits and mortgage lending outcomes

Edward Gaffney
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Edward Gaffney: Central Bank of Ireland

No 10/FS/22, Financial Stability Notes from 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.

Date: 2022-10
New Economics Papers: this item is included in nep-ban, nep-cba and nep-ure
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