Revised buyers' criteria mooted

New criteria for assessing the amount which home-buyers can borrow are suggested in the latest Bacon report as a means of making housing more affordable.

However, the report warns that these new criteria should only be introduced as new housing supply comes on to the market.

At the moment, mortgage borrowers are directed by the Central Bank to use guidelines of 2.5 times the gross salary of the main income-earners plus one time the salary of a second earner in determining how much to lend.

The report points out that in an era of low interest rates this may prove overly conservative and says a move to a system based on the borrowers' net, or after-tax, income could be considered.

In its response yesterday the Government said it would consult the Central Bank and the main banks and building societies, but bringing in any new guidelines must "be largely contingent on increased housing supply and sustained house price stabilisation".

The report gives an illustration of how such guidelines might work, for a couple where the main earner has an annual income of £25,000 and a second earner has an income of £20,000.

At the moment the maximum mortgage which should be made available to such a couple would be £87,500.

However, the report points out that with a joint net income (aftertax) of £25,000, the couple could conceivably afford a mortage of £120,000, if they were prepared to dedicate 33 per cent of their net income to mortgage repayments, or a £100,000 loan, which would involve 28 per cent of net income going on repayments.

Under such a scheme, borrowers would probably be obliged to lock in at fixed interest rates for a prolonged period of at least 10 years, to ensure they did not suffer unduly if interest rates rose sharply for a period.

Such longer-term fixed interest rate products are now becoming available on the Irish market.

The suggestion of new borrowing guidelines was one of the measures outlined in the report to try to bridge the gap between the size of mortgage which borrowers can currently afford and the price of houses.