Allowing first-time buyers to avail of mortgage insurance to plug the gap opened up as a result of the Central Bank's proposals to increase a deposit to 20 per cent is a "good idea", Minister for Finance Michael Noonan told the Dail this morning.

Mr Noonan said that he has asked a parliamentary committee to prepare a report on such an insurance, noting that it would be the private sector, rather than the government, that would offer it.

His comments come on the back of amove by the Central Bank to impose more stringent lending requirements, which, it is feared, will prevent many first-time buyers from getting on the property ladder. The Central Bank has proposed that it will increase the minimum loan-to-value of mortgage lending to 20 per cent, and cap the income multiple to 3.5, for the majority of mortgage lending.

Mortgage insurance is available in many countries but is currently used extensively in Australia, Canada, France, Hong Kong, Netherlands and the United States. It is an insurance product banks and building societies take out to protect themselves for any losses suffered as a result of a borrower defaulting on their mortgage and being unable to repay the outstanding debt with the proceeds of the sale of the property. US financial group Genworth Financial has in the past called for the introduction of such a product in Ireland.

While it is not yet clear how the product would work in conjunction with the proposed lending restrictions, in principle the product works by allowing a bank to lend 90 per cent of a purchase price to an individual. The individual then puts down a 10 per cent deposit, while a further 10 per cent of the mortgage is insured by a third party. The cost of the insurance is typically borne by the borrower.

(Additional reporting Bloomberg)