The Central Bank has announced a change in the rules on bridging loans, a type of lending to help people when they move house which disappeared after the financial crash and has only started to return over the past couple of years. But what will these changes means for borrowers?
What is a bridging loan?
The loans covered by the Central Bank change are those designed to cover a situation when someone purchases a new property before selling the old one. These properties must both be “principal homes” where the person lives – and not investments. Typically these loans would apply for between three and six months, and the maximum period allowed by the Central Bank is 18 months. According to the Central Bank, the terms “must not impose an obligation on the borrower to repay the capital/principal on the loan during its term”. In other words, the loan is repaid out of the proceeds of the sale of the original home.
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This type of finance was commonplace before the financial crash. But bridging loans were withdrawn after the crash as the upheaval in the property market started to cause problems (for example, by delaying sales or leading to big cuts in the price received by the seller) and regulators tightened rules. They are now making a slow return. ICS introduced a bridging product in autumn 2024 and this year Bank of Ireland followed with its “Trade Down” product. That was a significant move given its size in the marketplace. The bank secures the loan on both the old and new house – “to be sure, to be sure”.
Why is this loan seen as focused on those trading down?
First of all, apparently the polite term is now “right sizing”. Anyhow, bridging loans have generally applied to people moving to a smaller house as the bank generally gives a loan based on a percentage of the property being sold – 60 per cent in the case of Bank of Ireland and 70 per cent for ICS. Those “trading up” to a bigger house will need to generally start drawing down their mortgage and try to co-ordinate buying and selling, though in a minority of cases bridging might suit their circumstances too.
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What has changed?
The Central Bank has loosened the rules for people wanting to get bridging finance. Up to now, they generally had to meet the normal loan-to-income rules that applied to mortgages, which in the case of people trading from an existing property was a limit of 3½ times income on the size of the loan.
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As many seeking to move to smaller homes were older people, they may have been relying on pension income lower than what they would have earned when they were at work. Thus the loan-to-income rules provided a barrier while not really being relevant to the security of the loan – which relies on the original home being sold at or near the expected value. It is worth noting that banks could already bypass this loan-to-income rule for some loans under exemptions which allow them to lend above mortgage limits in a minority of cases.
This loan-to-income stipulation has now been removed. Loan-to-value rules continue to apply. This means that the bridging loan cannot be more than 90 per cent of the value of the home being sold. As the current loans on the market have tighter rules, this is not relevant, though of course it could be in future if new banks choose to enter the market. Banks are also responsible for their own lending so may retain other rules or requirements for borrowers beyond the Central Bank obligations.
There is a wider policy reason for doing this. Research from the Economic and Social Research Institute has shown that two thirds of Irish houses are “under-occupied” – in other words are too big. This would typically occur when children leave the family home. It makes sense to ease the path for those wanting to move to a small house or apartment, particularly given the chronic lack of supply of second-hand homes.
The Central Bank, in a note issued on the change, said: “Bridging finance products can play a role in supporting wider housing market functioning in terms of supporting liquidity in the second-hand market and provide additional options to people who may be looking to move to a home more suitable to their needs.”
So this is good news?
It certainly will make it easier for people to get bridging loans. Mortgage broker Michael Dowling says there is demand for this type of lending, even if it can be difficult for people to find a property to trade down to in their own area. He points out that “right sizing” is “not just a financial transaction and that people will look to remain in an area where they have connections and convenient access to services. In turn, this can limit choice, particularly of lower-priced options.
He welcomed the Central Bank moves but said that the limits put by Bank of Ireland on the loan size – 60 per cent of the value of the larger house being sold – in many cases may not cover the cost of the new, smaller property. The interest rate on its loans are 7 per cent. The ICS product covers up to 70 per cent of the existing home, though the interest rate cost is significant higher at 10 per cent.
Are there dangers?
Dowling makes two points. He points out that the loans are generally expensive and sometimes fees are involved, too. This can increase the cost significantly if the bridging period drags on – for example, for a €500,000 loan, the cost for a year would be €35,000 at a 7 per cent rate.
Shorter-term rates would be expected to be more expensive – and bridging always has been – but the rates are well above typical mortgage rates now in the 3 to 4 per cent range and more in line with personal loans, where there is less security for the lender. For movers borrowing for a month or two this may not matter too much, but for longer periods it quickly adds up.
Dowling also believes borrowers should only enter into a bridging arrangement when they have a contract to sell their own home signed – to reduce any risk to them of being stuck with the higher interest rate for a long period if a proposed sale falls through. He suggest that this should be made a stipulation of the loans.
John Fahy of Pangea Mortgages takes a negative view of bridging for ordinary borrowers because of the risks of a market fall leaving potential sellers exposed.
“One reason for introducing them was the inefficiencies in the banking and legal processes, which means buying and selling property takes too long and is full of gaps,” he said. He argued that the Central Bank “would be far better off pushing modernisation of the current archaic mortgage application process than tinkering with products that are too expensive for most customers”. The wheels of the legal and banking system move frustratingly slowly for many buyers.
The future
Bridging appears to be making a slow comeback and there is still a lack of competition in the market, which would be expected to offer lower rates to borrowers. Given the cost, those moving will be cautious of getting caught “on bridging” for a prolonged period or a year or more. Other players may now enter the market, encouraged by the Central Bank change. Its information note points out that the change is also a move to ensure “that the mortgage measures are not inadvertently impeding the provision of or competition in this type of lending, in particular by smaller or specialised lenders who have less flexibility to lend above the limits under the current framework”. The rules say that lenders can lend above the mortgage limits in 15 per cent of cases; for lenders with smaller loan books, this can be a significant restriction.
Whether other banks will now bite and enter the bridging market, leading to improved deals for borrowers, remains to be seen. Meanwhile, borrowers are well advised to have the sale of their old home in the bag and signed before they take out these loans – and also to carefully consider the likely cost.
