The Central Bank on Wednesday announced a series of changes to mortgage lending rules that have been in place since the financial crash. But why now and what impact will it really have on the market?
What has the Central Bank done?
The Central Bank, which sets limits on how much banks can lend to potential homeowners, has increased the amount people that first-time buyers can borrow as a multiple of their income. Since the financial crash, homeowners, in general, had an upper limit on the amount they can borrow of 3.5 times their income. That is now rising to four times — but only for first-time buyers.
It is also extending the definition of first-time buyer under these rules. Until now, anyone who had previously owned a property was excluded from the slightly more generous rules that applied to first-time buyers. That also affected couples where one was a first-time buyer but the other had previously had an interest in a property even as a part owner.
Now, the bank will accept that anyone who is formally separated or divorced will be considered a first-time buyer if they no longer have a financial interest in their former home. The same applies for people who have gone through bankruptcy or insolvency in which they have lost their home.
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Interestingly, existing first-time homeowners who get a top-up loan or apply to increase their borrowings by remortgaging will still be seen as first-time buyers for the new, higher loan to income multiple even though they already own their home, as long as they continue to live there.
So only first-time buyers will benefit from the changes?
No, there is something for other buyers though they will not benefit from the higher loan-to-income multiples. Instead, the Central Bank is making it easier for people to build up a deposit for a new home. At present, anyone other than first-time buyers needs a deposit of at least 20 per cent of the value of the new home. The regulator has decided to reduce that to 10 per cent, in line with the threshold that currently applies for first-time buyers.
Anything else?
Yes, while the Central Bank is making life easier under the loan-to-income rules and on deposits, it is tightening up the wriggle room that banks currently have for making exceptions. At the moment, banks can make exceptions on the loan-to-income rules for 20 per cent of all their lending in a year to first-time buyers. The exceptions allow banks to lend up to 4.5 times gross income to borrowers, instead of three times. That figure will now be reduced to 15 per cent from 20 per cent and there was no suggestion that the upside of the exception — 4.5 times income — would be raised in line with the increase in the overall loan-to-income limit.
On loan-to-value rules, banks are currently allowed to make exceptions to the 80 per cent maximum for up to 20 per cent of their lending to existing homeowners looking to move. With the loan-to-value limit now rising to 90 per cent, the Central Bank is also limiting exceptions on this measure to 15 per cent.
When will the new rules come into play?
The new rules come into force from January. It is not clear if house-hunters who already have mortgage approval but have not yet found their home or drawn down the mortgage will be able to increase the amount available to them without going through the whole process again.
In any case, the two-month gap is likely to have a cooling effect on purchases by first-time buyers in the interim. It might also give developers more time to consider how the changes might affect their pricing strategies on newly built estates.
How much of a difference will it make?
That’s not clear. On the face of it, it means aspiring homeowners will see a 14 per cent jump in the amount they can borrow. A couple with combined earnings of €85,000 could borrow €297,500 under the existing rules. With this change, that figure will jump to €340,000.
For existing homeowners, the new loan-to-income rules make no difference at all unless they have lost their stake in the home through separation/divorce or bankruptcy. The lower deposit change might help some people, although the deposit would be less of an issue for many people who have owned property over the last few years as rising prices mean the value of their home has gone up, giving them more equity in the property to deliver a deposit when it is sold as part of any move.
Where it will help is for those couples looking to buy their first home together but where one of them did previously have a share in a property, technically making them second-time buyers. The 20 per cent hurdle was seen as oppressive for many in that position and the new deposit rule will help.
Why has the Central Bank acted now?
The Central Bank has come under sustained pressure to adjust the rules as house prices increase to a point where many individuals and families cannot secure a sufficient mortgage under the current income rules. This has been the case even where they are paying more in rent than they would if they could qualify for a 90 per cent mortgage on a new home.
The income rule was seen as among the more restrictive across Europe. According to the Central Statistics Office’s residential property price index, the price of a newly built home has jumped by 87.8 per cent from a trough in the middle of 2013. The figure is even higher for previously owned properties, which have comfortably more than doubled in price since the rules were introduced after the financial crash. Salaries have gone up by just a fraction of that amount over the same period, making homes increasingly unaffordable to people under the Central bank’s existing loan-to-income rule.
The inclusion of people who are separated, divorced or have otherwise lost their homes through bankruptcy is simply an acknowledgment of the reality of people’s situations. Without some relief, many is this group are simply locked out of the housing market as it now stands.
First-time buyers form the single largest part of the Irish mortgage market, but with rising costs of labour and building materials and more uncertainty over whether customers will have access to funds to buy the homes at the end of the day, there has been concern that developers are reluctant to increase the supply of property by the sort of figures the Government is targeting.
Will it make a big difference for homebuyers?
That remains to be seen. The Central Bank rules are an upper limit for lenders — although there has always been room for exceptions as mentioned above.
But banks are increasingly wary of higher loan multiples in an environment where interest rates are rising fast and to levels not seen in a generation, while wider cost-of-living pressures across the economy are putting pressure on people’s discretionary income. Regardless of the Central Bank rules, some lenders are already cutting back on the maximum loan to income they are prepared to lend.
They are also stress-testing mortgage applicants’ ability to pay by more stringent rules. ECB interest rates have already jumped by 1.25 percentage points since July, with more to come as soon as next month. Of the big lenders, only AIB has moved on rates and, even then, it has passed on only 0.5 of a percentage point of the recent increases. Mortgage rates are bound to rise significantly over the next year or so and lenders will want to be sure that new homeowners will not find themselves in trouble on loan repayments.
Why did the Central Bank wait until now then, if its new looser rules will be offset by interest rates and the slowing economy?
The bank has consistently erred on the side of caution. In particular, it has argued — and studies support its position — that looser lending rules would only have been passed through in higher property prices, leaving aspiring homeowners no better off than they were before in their ability to buy a home but more indebted where they can afford to do so.
It has also been determined to avoid some of the reckless lending that went on before the financial crash, the legacy of which the banks and many borrowers are still living with. That is why, in particular, there has been no talk of increasing the loan-to-value threshold — the amount people can borrow as a percentage of the purchase price. And even with these new loan-to-income limits, people will be expected to save up for a deposit on their new home.
We will hear later on Wednesday the Central Bank’s thinking behind the loosening of the loan-to-income rules but it is likely to be driven by an acceptance that the 3.5 times multiple is now having an unreasonably limiting effect on the ability to buy a home.
Announcing the changes, Central Bank governor Gabriel Makhlouf stressed the important role of the rules of the long-term health of the mortgage market. However, he added: “At the same time, it is clear that affordability and access to housing are key challenges facing many people in Ireland.”
