Major fears for mortgage competition after lender caps loans at two and a half times salary

A mortgage lender must cap the amount of new home loans at just two and a half times first-time income.

It’s a move that will spark major fears of collapsing competition as Ulster Bank and KBC leave Ireland.

ICS Mortgages’ decision to heavily restrict its lending should give huge market power to AIB, Bank of Ireland and Permanent TSB.

They are already benefiting from the planned exits of Ulster Bank and KBC and have boosted their mortgage business by buying mortgage books from the two exiting banks.

The ICS loan cut is raising huge fears about competition in the mortgage market at a time when the European Central Bank has embarked on a tough plan to hike rates.

Mortgage experts said that so far mortgage rate cuts by non-bank lenders such as Dilosk-owned ICS Mortgages and Finance Ireland, as well as Spanish bank Avant Money, have kept rates competitive.

Although a niche player compared to big banks like AIB or Bank of Ireland, Dilosk has over €1.4 billion in mortgages on its books and thousands of customers.

Figures earlier this week showed Ireland was the only eurozone country where mortgage rates fell in June.

And the spread between mortgage rates here and the rest of Europe has narrowed in recent months. Now, there are fears that the banks will find it easier to raise their rates.

ICS Mortgages told brokers it is restricting residential mortgages because it has “exceeded our 2021 issuance levels and, with a strong pipeline in place for the remainder of the year, we expect to comfortably exceed our business forecast for 2022”.

Non-bank lenders obtain their funds from the markets, leaving them exposed to rising market rates. Banks here are funded by customer deposits and currently have excess levels.

A recent Central Bank report found that the funding model of non-bank lenders made them more vulnerable than banks to the cost of funding.

ICS, which has raised rates twice this year, has now told brokers that couples will need a joint income of at least €100,000 to qualify for a mortgage.

It will lend only two and a half times the income of applicants, compared to the three and a half times the limit imposed by regulators.

Bonuses and other variable remuneration will not be taken into account in the calculation of candidates’ income.

First time buyers will only be approved for 80% of the property value. This figure drops to 70% for second-hand buyers. There will be no equity release in switch applications, and self-employed applications will be evaluated based solely on director salary or draws.

Broker Michael Dowling said the restrictions meant very few applicants would meet the loan approval criteria.

“If all the other lenders did that, it would freeze the market,” he said.

He said ICS Mortgages was effectively saying it was closed for mortgage business at the moment. “This will be welcomed by the banks as they will now have carte blanche. It’s not good for the market,” Mr. Dowling said.

The non-bank lender was created when Bank of Ireland was forced to sell its ICS brand in 2014.

ICS/Dilosk Commercial Director Ray McMahon told brokers: “We are working to improve our service levels, further diversify our funding and develop a number of exciting new products with innovative features. We look forward to continuing to develop these initiatives as securitization and hedging markets normalize.

“As soon as the markets normalize, we intend to reverse all these temporary changes. Our buy-to-let criteria remain unchanged.