Banks stress-testing mortgages

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Shawady

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http://www.independent.ie/business/...cting-mortgages-with-tough-rules-1744558.html

I read this piece in the Indo and was surprised people are being critical of the bank's decision to stress-test applicants to ensure they could make repayments if the ECB rate rose to 5%.
Surely this is a good thing?
If banks had have displayed this type of caution a few years ago, house prices may not have rose so dramatically.

The ECB rate went from 2 to 4.25% in a short space of time two years ago so it does not sound unreasonable.
 
Yes, interest rates are artifically low at the moment, 5% is "normal"
Article is a bit sensational, it seems to be mainly brokers complaining
 
I don't see what is wrong with stress testing. I needs to be done. Why lend money to someione who may not be able to repay?
 
so why dont figure what the break point is for the applicant eg 4% and when the rate hits that, re-assess and if it is still the break point, have an agreement in place to fix at 4% for x years.
 
tiger said:
Yes, interest rates are artifically low at the moment, 5% is "normal"
Article is a bit sensational, it seems to be mainly brokers complaining
Click to expand...

Highest ECB rate was 4.25% and it only remained at this rate for 4 months. The ECB has been in existence for approx 10 years now. So cant see how 5% is "normal" but I do take your point - interest rates are artifically low in a big way...
 
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4% is considered to be the normal interest rate for the average western economy. Stress tests are usually + or - 2%. So stress testing mortgage applicants at 4%+2%=6% would appear to be sensible.
 

Absolutetly correct Shawady. If you look at the Euro yield curve, the expected interest rates in the medium to long term will be about 4%. This means that we expect a 50% chance they will be higher than this at any given point in the future.

Anybody suggesting that we stress test at rates below the medium to long term rate (simply because of where the overnight rate is at the moment) is an absolute idiot and should be hounded out of any kind of position where they are seen as an expert in financial matters be it as a Journalist, Consumer advocate, Economist, government minster etc
 
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