Should the LTV and LTI criteria be integrated?

Brendan Burgess

Brendan Burgess

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The first test a lender should apply is the affordability or LTI test.

Then they should also apply the LTV test.

If someone is on the limits of the LTI test, but they have a low Loan to Value, then the bank's risk is low.

|John|Mary|Paddy
Salary|€100k|€40k|€40k
Deposit|20k|€50k|€10k

It's probably ok to lend John €200k or 90% LTV

It's probably ok to lend Mary €160k as the LTV will be only around 75%

Paddy should probably not get a mortgage of over €50k


Rather than have two separate allowances for exceptions, there could be one allowance of 20% exceptions for either criterion.
 
Been in the banking business for 20+ years and never heard of LTI. Fair dues to you Brendan, I have no idea what the acronym (or shoud it be synonym) stands for. We would normally call this a RCR (repayment capacity ratio or sometimes DSCR (don't ask!).
the difficulty here is that when a policy is being revised both RCR and LTV are stand-alone. i.e. In order to approve under policy the borrower must have a LTV of 80% and an RCR of at least 1:1. The idea of percentages is a fair one, but how can a bank police this? It would lead to some strange decisions if you were near the end of the period and hadn't met your exception quota! Generally the safe thing to do is forget exceptions. They are potentailly higher risk and more trouble to process. Why would you bother if you were a bank?
 
The Central Bank should have set the max. LTV to maybe 90%, max. term to maybe 25 years and beyond that just insist that the mortgage repayment is demonstrably affordable for the applicant(s). What they are proposing is a bit of a mess.
 
We all agree that lenders should not give 100%, interest only, mortgages to people who borrow 6 times their gross income.

In general, it's probably a good idea from the lender's point of view to limit mortgages to 80% LTV. This gives them a margin if the borrower gets into difficulty and house prices fall.

But if a first time buyer has a 10% deposit and a good LTI multiple, they should be able to borrow.

In this post Dermot suggests that if they have only 10%, they would pay the other 10% over the first 5 years.

I think that this could be combined with the LTI and LTV. For example, if someone is borrowing 90% LTV, then the maximum term would be 20 years. This is just another way of saying that they must make higher capital repayments in the initial years to get the LTV down to 80%.

If their income allows them to make these higher repayments, then they should be given a 90% mortgage.
 
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