Bank of Ireland is tightening its mortgage lending rules as the European Central Bank starts to ramp up rates in the face of the highest inflation in nearly 40 years.
The bank will be changing the system through which it calculates mortgage holders' monthly disposable income after they have paid their mortgage, as soaring food and energy costs mean that people are now at greater risk of defaulting.
However, the bank's basic system for calculating how much people can borrow, based on income, will remain the same.
With price rises across the board at their highest since the early 1980s, the bank is worried mortgage borrowers will be unable to afford their repayments if rates go up a further two percentage points, a financial stress test that must be applied to all mortgage applicants under Central Bank rules.
The new rules are understood to have been passed on to mortgage brokers.
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A spokesman for the bank said: "Assessing a loan application involves stress-testing across a number of scenarios to ensure the loan is still affordable if things change.
"This has always been a feature of mortgage assessments and we keep it under ongoing review. This is to ensure that prospective new customers are protected against potential shocks."
The bank is now set to tighten up its affordability rules in the face of inflation at an almost 40-year high and the ECB raising interest rates.
It has told mortgage brokers it is continuing to monitor the repayment capacity of new applicants against expected further rate increases. A sharp tightening of lending across the market would also cool prices as buyers would have less money to outbid rivals for homes.
Prices are currently rising by 13% a year nationally which is down from a recent peak of 15.1% in March.
Housing campaigner David Hall, of the Irish Mortgage Holders Organisation, said: "In the current climate, they have to protect people, there's so much uncertainty it's not fair to give somebody money to buy what is their biggest purchase ever only to have those hopes and dreams dashed by an inability to pay. The bank has to take a prudent approach. As unfortunate as it is, I think it's sensible. We can't read too much into it but does it signal an intent to pass on interest rate rises as well?"
A Central Bank note published last month estimated that up to a third of lower-income Irish mortgage holders could face financial distress trying to meet loan repayments if recent levels of inflation are maintained.
The paper defined a homeowner as being "at risk" of financial distress when their residual income is less than 10 per cent of their monthly mortgage payments, after meeting home loan obligations and paying for essential non-housing items.
The tightening by Bank of Ireland follows a move by ICS Mortgages, which decided last month to temporarily restrict new home loans to 2.5 times borrowers' gross income rather than the standard 3.5.
