Banks and building societies have been told to "tighten up" their mortgage-lending practices and to demand more documentation from customers to prove that they will be able to repay home loans.
The Irish Financial Services Regulatory Authority (IFSRA) signalled yesterday that some financial institutions had been more lax than others in establishing customers' income and the extent of other debts they may have taken on apart from their mortgages. It refused to discuss specific institutions.
The warning comes as new figures from the Central Bank show a 24 per cent rise in mortgage lending in September compared to the same month last year, the highest increase since December 2000. The IFSRA and the Central Bank are concerned that some mortgage-holders may have overstretched themselves and may come under pressure if interest rates were to rise or if unemployment were to increase.
The IFSRA has told the chief executives of Ireland's financial institutions to make greater efforts to verify customers' incomes and to establish the source of any monies used to fund the balance of the price of their home. "This is to strengthen the procedures to ensure that loans are properly secured and will be repaid in full," it said yesterday.
The IFSRA has told the banks and building societies that they should demand documents such as a P60 or an audited set of accounts from customers to verify that they are in a position to repay their mortgage. It also expects the lenders to examine closely the source of any monies prospective homeowners may have when they come looking for a mortgage.
Increasingly, many young borrowers are receiving funds from their parents to help them to buy a new home. The IFSRA said the financial institutions should obtain a written declaration that such monies were given as a gift and not as a loan to be repaid in the future.
The IFSRA's chief executive, Mr Liam O'Reilly, said it was important that institutions "should only advance loans that are fully suited to their customers' circumstances".
The regulatory body will shortly begin to consult the financial institutions and consumer groups with a view to introducing a set of requirements to force every mortgage lender to disclose the basis on which they have calculated the repayment ability of their customers.
The Irish Bankers' Federation and its affiliate, the Irish Mortgage Council, yesterday welcomed findings of the Irish Financial Services Regulatory Authority and said it would always welcome the continuing emphasis on ensuring that loans were properly secured and would be repaid in full.
The State's biggest mortgage-lender, Permanent TSB, said it would pay careful attention to the regulator's comments and would continue to review its procedures for verifying customer incomes.
A spokesman for Bank of Ireland said the ability to repay a loan had always been its primary focus when advancing loans.