Irish lenders urge central bank to scale back mortgage rules

* Limits proposed for loan-to-value ratios and income multiples

* New rules due to start next year

* Banks have until Dec. 8 to respond to the proposals

By Padraic Halpin

DUBLIN, Nov 13 (Reuters) - Ireland (Other OTC: IRLD - news) 's banks have urged the country's central bank to scale back proposals to restrict how much they can lend to home buyers, warning that first-time buyers could be priced out of the market.

The central bank wants to avoid any repeat of the reckless lending and lax regulation that led to a devastating property crash six years ago and has proposed the limits as prices recover quickly amid a lack of supply in urban areas.

The measures would require banks to restrict lending above 80 percent of the value of a home to no more than 15 percent of the aggregate value of all housing loans. They will also impose restrictions on the amount of lending in excess of 3.5 times a borrower's gross income.

Senior (Other OTC: SNIRF - news) politicians, including the deputy prime minister, have questioned the capacity of younger potential buyers to save a 20 percent deposit; views echoed by the chief executives of the country's banks over three days of parliamentary hearings.

"The proposals as they stand will impact on the ability of many first-time buyers to buy a home," Ulster Bank CEO Jim Brown told Thursday's hearing.

Brown said that Ulster Bank, owned by Royal Bank of Scotland (LSE: RBS.L - news) (RBS.L), estimates that 68 percent of the first-time buyers mortgages it has approved this year would have fallen foul of the new proposals.

He said the bank is comfortable with the proposed loan-to-income ratios - with 85 percent of its loans at or below 3.5 times a borrower's income - but added that the central bank had to consider tight housing supply and rising rents when setting loan-to-value levels.

Executives at permanent tsb had already called for the rules to be moderated and introduced more gradually, saying on Wednesday that demand for mortgage finance would be dampened if the proposed limits are not amended.

Bank of Ireland said it was concerned that customers would turn to unsecured credit to pay deposits, while Allied Irish Banks (AIB) also backed a phasing in of the rules.

Banks have until Dec. 8 to respond to the proposals ahead of their intended implementation next year.

"The principles are valid. The real issue is execution and that involves, in my mind, some element of transition so that the law of unintended consequences doesn't drive out a sector of the economy," AIB Chief Executive David Duffy said. (Editing by David Goodman)