Friday, 22 May 2009

AIB display prudent lending policies

I see that AIB have now started "stress-testing" mortgage applications at 5%. Stress-testing is a process by which a lender evaluates an applicant's ability to repay a loan if interest rates increase.

Given that their actual variable rates for new customers vary between 2.25% and 2.65% they are factoring in potential future rate increases between 2.35% and 2.75% in assessing a customer's ability to repay. This is well in excess of the Financial Regulator's guidelines on stress-testing and AIB are to be commended for it. It may result in their losing business to competitors who will stress test at a lower rate, but recent events have shown that being the lender who will offer the biggest loan isn't necessarily a good thing.


valueireland said...

Liam - do banks include an ability to pay in stress tests given a decrease in income as well as an increase in interest rates?

Liam D. Ferguson said...

Thanks for the comment.

I'm not aware that banks factor in a potential decrease in income. However, they will use current rates of taxes, PRSI & levies in their calculations so as income levies get added or increased, they are used in calculations.

Banks will generally take a person's occupation into account so those working in industries that have been hardest hit by the recession (e.g. construction) will need to prove that their own job is relatively safe.