The Financial Regulator is set to introduce new regulations governing the stress-testing of mortgages in the near future. The changes, which are expected to be introduced next month will amend the current practice of stress testing mortgages to determine repayment capacity at a rate 2% above the ECB rate. The proposed changes will mean that future mortgage applications will be tested at a rate of 2.75% above that of the ECB.
Up to this point, lenders have stress-tested mortgages to establish whether borrowers could afford payments on loans at an increased rate of 2% above the ECB rate. Many lenders in the Irish market don’t stress-test applications that seek 5 year fixed rates. The new regulations will require that lenders stress-test all applications to make certain that borrowers can make repayments at the new higher rate of ECB +2.75%. The policy of some banks not to stress-test 5 year fixed rate mortgage borrowers, meant that many qualified to borrow larger sums than a standard variable rate mortgage would allow. These new directives will put an end to this practice.
It is thought that this new regulatory action has been spurred on by the continued market turmoil, ultimately the result of huge amounts of defaults on mortgage repayments in the US. European regulators are keen to stabilise markets and the introduction of stringent rules governing lending practices is hoped to provide some stability.
In the short term however, it is unlikely that borrowers will be pleased with the announcement as it may provide them with further borrowing constraints.