Credit unions should proceed with caution on mortgage lending

Proposals from the Central Bank of Ireland to ease the long-term lending restrictions imposed on Irish credit unions to allow them grow their mortgage and commercial loans have been well received.

Under current regulations, there are limits on the amount that credit unions can lend out over five and 10 years. Only 30 per cent of a credit union’s loan book can be lent out over five years, and just 10 per cent can be lent out over 10 years.

The Central Bank now proposes removing these lending maturity limits and replacing them with “concentration limits” for house and commercial loans, the two main forms of long-term lending.

Under the new proposals, all credit unions would be allowed to lend for housing and commercial loans to a limit of 7.5 per cent of the total assets of the union. An increased limit of 15 per cent would be available for credit unions with total assets of €100 million or more.

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There are 264 credit unions in the Republic, 53 of which have lending of more than €100 million. The Central Bank said the revised limits would provide scope for nearly €1.3 billion of lending by credit unions for house and commercial loans.

Ireland’s average residential mortgage interest rates are the highest in the euro zone, with Irish banks being accused of ripping off customers here. Against that backdrop, increased competition from credit unions is to be welcomed and the regulator appears to have set the criteria at about the right levels.

However, we would do well to remember that long-term lending is a risky business – more than 750,000 residential mortgages fell into arrears after the crash – and repossessing family homes in the event of a default is incredibly difficult and time-consuming in Ireland, and potentially damaging to the reputations of community organisations such as credit unions. They should proceed with caution.