Mortgage servicing burdens and LTI caps
Jane Kelly and
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Jane Kelly: Central Bank of Ireland
Elena Mazza: Central Bank of Ireland
No 13/FS/19, Financial Stability Notes from Central Bank of Ireland
The Central Bank of Ireland regulates Loan to Income (LTI) ratios. The aim is to strengthen both bank and borrower resilience and to reduce the likelihood and impact of a credit-house price spiral emerging. However, the Central Bank also monitors many other measures of household vulnerability, including mortgage service to income ratios (MSTI). Using Irish micro data, we illustrate that mortgage service burdens vary for similar LTI levels due to underlying differences in origination interest rates and mortgage terms.We highlight the variation in origination servicing burdens through the interest rate cycle even within narrow LTI bands.We also show that servicing burdens on loans above the LTI limits are generally more sensitive to interest rate shocks than those below the limits.
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