The continued surge in the demand for residential mortgages will heighten Central Bank concerns about the lending policies pursued by Irish financial institutions. Siobhán Creaton, Finance Correspondent, reports.

The Central Bank, which regulates the financial services industry, has already begun to inspect those policies to try to ensure that banks and building societies are not granting mortgages that many of their customers will find difficult to repay.

In May, the Bank recorded a 24 per cent annual increase in demand for residential mortgages for the third successive month.

During May, the Bank said the total amount of money lent out in mortgages to customers of Irish banks and building societies rose by €942 million. Credit growth figures compiled by the Bank reveal that the demand for all types of loan rose by 16 per cent last month, fractionally below the 16.1 per cent rise recorded in April.

Last week Central Bank governor Mr John Hurley reiterated the Bank's concerns about the sustained high demand for mortgage lending.

Mr Hurley said the Bank was disappointed that the rate of growth had not slowed in the light of weaker economic growth and a decline in income levels.

In its annual report, the Central Bank warned of the adverse consequences for the Irish economy if lenders did not take due account of borrowers' ability to repay loans over the longer term. It suggested that there was a "strong sense" that lenders were focusing on volume growth and market share.

"Such behaviour is often a leading indicator of financial fragility, which concerns the Bank in an increasingly uncertain economic environment."

The report also noted that experience would suggest that the consequences of a bust in house prices would inflict double the damage inflicted by an equity price bust. It added that there was a risk that the pressures prevailing in the Irish property lending market could undermine lenders' assessment of borrowers' ability to service increasingly large loans in more difficult times.

The total amount of credit outstanding in the economy was little changed in May, with a fall of €1.3 billion in funds being lent to companies based at Dublin's International Financial Services Centre (IFSC) being offset by a similar rise in domestic lending, with residential mortgages accounting for almost €1 billion of the increase, according to the Central Bank.

The Central Bank said that residential mortgages increased by €942 million last month. The demand for other loans eased marginally in May to 11.2 per cent from 11.3 per cent in April.

The demand for overdrafts, which had fallen in April, recovered in May to increase by 218 million. Other mortgages rose by €33 million.

The Bank recorded substantial drops in other loan categories. Loans up to and including one year fell by €593 million, while term and revolving loans were €476 million lower. Repurchase agreements were broadly unchanged.

The amount of cash on deposit increased. Funds held in current accounts rose by €320 million while monies put on deposit for up to two years expanded by €200 million. Repurchase agreements also increased by €185 million.

Shorter-term deposits showed some decline with monies redeemable in up to three months contracting by €812 million and debt securities with up to two years to maturity fell by €310 million.

The amount of money in Special Savings Incentive Accounts (SSIAs) rose by €128.6 million to €2.2 billion in May.