The Central Bank has reviewed the mortgage lending criteria and has made some positive changes for borrowers. These new rules will take effect from January 2023.
These changes are very much welcomed for house hunters in Donegal where prices are increasing sharply and by those building their own homes (self-build) when build costs are also increasing sharply.
The main changes for people in Letterkenny, Donegal
- First-time buyers will be able to borrow up to 4 times their gross income.
- Loan to value for second & subsequent buyers will increase to 90% from 80%.
- These apply to those self-building as well.
- Fresh Start for borrowers who are divorced or separated or have undergone bankruptcy or insolvency may be considered First Time Buyers.
No changes too:
- Second & subsequent buyers will continue to be able to borrow up to 3.5 times their gross income.
- Loan-to-value (LTV) for first-time buyers will remain at 90%.
- Loan-to-value for buy-to-let or holiday home buyers will remain at 70%.
- Lenders will continue to be able to lend a certain amount above these limits, in line with their own credit policies.
The Central Bank of Ireland announced this change on 19 October, coming into effect on January 2023
Over an 18 months period, the Central Bank conducted a comprehensive review of the mortgage measures framework to ensure it remains fit for purpose into the future as the economy and financial system evolve.
This review was informed by engagement with the public and a range of stakeholders in Ireland and abroad. Through a series of engagements – including a public survey with over 4,000 responses, a public consultation, listening forums, and a conference – they say they have listened and learned.
The review was also informed by the experience of countries with similar measures and by substantial research and analysis by the Central Bank.
Central Bank say
Whilst many things have changed since the current lending rules were introduced in 2015, they remain an essential policy instrument to maintain financial stability. The measures have been working as intended and have strengthened the resilience of borrowers, lenders, and the wider economy.
The review reaffirms the benefits of the measures, through fostering a more sustainable mortgage market. The measures act as system-wide guardrails and do not aim to replace lenders’ own prudent credit assessments, which remain central to the functioning of the mortgage market.
At the same time, underlying structural challenges in the housing market remain and have intensified. At the core of these challenges is an imbalance between the demand for housing and the supply of housing. We are now building fewer houses, for a given level of house prices relative to incomes, than we did in the past. These trends have resulted in growing affordability pressures, with house prices and rents continuing to rise faster than incomes.
The Central Bank’s view is that these challenges are best addressed by policies that improve the type and level of housing supply.
The above statement rings very true in Letterkenny and in County Donegal in general, where the number of new housing developments is very low and the number of second-hand houses coming to market is also low, while demand is surging upwards. Leading to major concerns for house hunters in Donegal.
Issues in the housing market
However, the Central Bank is conscious that like all policy interventions, mortgage measures have both benefits and costs to society. The higher house price-to-income ratios that have resulted from structural developments in housing supply mean that the economic costs of the measures have risen since the introduction.
To recognise these developments and balance the measures’ benefits and costs, Central Bank has announced these targeted changes.
The following framework will apply from 1 January 2023:
A dual-instrument approach (using Loan to Income and Loan to Value) will be maintained.
These lending limits operate alongside individual lenders’ credit policies and are not a substitute for lenders’ responsibilities to assess affordability and to lend prudently.
Loan to Income (LTI) sets a limit on the amount of money people can borrow relative to their gross income. This will move from a flat limit for all buyers to differential limits:
- First-time buyers can borrow up to 4 times their gross income. This is an increase from 3.5 times.
- Second/subsequent buyers will continue to be able to borrow up to 3.5 times their gross income. So, no change here
- This change recognises the different roles played by different borrower types in the housing market.
Loan to Value (LTV) requires borrowers to have a minimum deposit before getting a mortgage. This deposit aims to create an ‘equity cushion’ to strengthen the position of consumers and lenders.
- The LTV for first-time buyers will remain at 90%.
- The LTV for second/subsequent buyers will move to 90%. This is an increase from 80%.
- This means that both buyer types will need to have a minimum deposit of 10%.
- The LTV for buy-to-let buyers will remain at 70%.
The use of allowances – which allows lenders to issue a certain amount of lending over the LTV and LTI limits – has been important to provide flexibility to cater to individual circumstances. Lenders will have allowances to permit 15% of their lending above these limits for both first- and second-time buyers.
Fresh Start changes
- From a “fresh start” perspective, borrowers who are divorced or separated or have undergone bankruptcy or insolvency may be considered FTBs for the mortgage measures (where they no longer have an interest in the previous property);
FTBs who get a top-up loan or re-mortgage with an increase in the principal may be considered “first time”, provided the property remains their primary home.
Already have an approval
If you have approval already and would qualify for a higher lending amount based on these changes you can apply for the higher lending amount from January. So, you should discuss this with your provider now or call your mortgage broker, if you don’t have a broker, we in Advice First Financial Team are happy to help.
Central Bank Comments
Publishing the review, Governor of the Central Bank of Ireland Gabriel Makhlouf said: “The mortgage measures are essential in our mission to serve the public by maintaining the financial stability of the economy and households as a whole, so it is good policy practice to review these given the broader changes in the economy. While not always immediately visible to people in their daily lives, the benefits of the measures are long-term.
“The level of engagement during the review from the public and stakeholders was extremely welcome and provided us with a range of insights on the measures and the broader mortgage market. Our public engagement showed strong support for mortgage measures – over 70% of people who responded to our online survey believed that these types of measures have a permanent role to play in the mortgage market.
At the same time, it is clear that affordability and access to housing are key challenges facing many people in Ireland. At the core of these challenges is the need to increase the supply of housing.
“The review shows the measures have increased the resilience of borrowers, lenders, and the broader economy. However, we are acutely aware that like all policy interventions, mortgage measures have both benefits and costs to society. A lot has changed since the measures were first introduced. The changes we are announcing are both targeted and proportionate, and recognise the resilience built up over the last decade and the structural changes across the economy.”
If you have questions on New Mortgage Lending Rules or need Advice on Mortgages
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