EXPLAINER: What are the changes to mortgage lending rules in Ireland

Last week, the Central Bank made a number of changes to mortgage lending rules that have been in place since 2015. The changes made will make a big impact especially to first time buyers, people moving property and those who are divorced/ separated or went through a bankruptcy or insolvency arrangement.

The changes will come into effect from the 1st January 2023.

So, what exactly are they?

First Time Buyers
Previously the income multiple you were allowed to borrow was 3.5 times your gross annual income, and that now has become 4 times.

So, if you and or your partner had a total gross annual income of €70,000, the amount you could borrow before the change was made was €245,000, which meant if you contributed the minimum 10% deposit towards the purchase price, the maximum property you could afford was about €272,000.

Now that same person/couple can borrow €280,000 which means they can now consider properties costing €311,000, again assuming they contribute 10% towards the asking price.

It means that uplift will allow FTB’s broaden their search and include properties they previously perhaps hadn’t been able to consider.

Below are some examples of what the change means to borrowing amounts:

Income - Before - After (4 x)
€40,000 - €140,000 - €160,000
€55,000 - €192,500 - €220,000
€70,000 - €245,000 - €280,000
€95,000 - €332,500 - €380,000

There is no change to the % of the purchase price a bank is allowed to lend to FTB’s and that stays at 90%.

However, it’s worth pointing out that a FTB could in fact buy a property costing up to €300,000 without having any savings at all, if, they purchased a new qualifying property using the enhanced Help to Buy Scheme (HBS).

FTB’s can claim back the lesser of, (a) €30,000 (b) 10% of the purchase price of a new property (c) 10% of the approved valuation of a self-build property or (d) the amount of income tax and DIRT they paid in the previous 4 years.

So, if a property was costing €300,000 , the mortgage amount would be €270,000 i.e. 90% and the remaining 10% would be funded by the HBS scheme, provided either the single applicant or joint applicants have paid in excess of €30,000 in income/DRT tax in previous 4 years, and their annual gross salary was €67,500.

Prior to the change they would have to be earning €77,142 in order to qualify for a €270,000 mortgage.

Second Time Buyers

There will be no income multiple change for this borrower, but what will change is the % they have to bring with them towards their next purchase.

Previously that number was 20% of the purchase price and now that has been reduced to 10%.

So, if they were moving and the asking price of their new property was €400,000, they would have to contribute €80,000 towards the purchase. With the changes made, that now has become €40,000.

This change could be significant and allow people to move quicker because they now don’t have to bring as much equity from the sale of their house as they had to.

If people didn’t have savings or didn’t want to use much of them, they were relying on their selling price and the mortgage balance outstanding to, make up the differential of 20%. And depending on what way property prices went it could mean for some they couldn’t move for 10 years or more because it would take that long for them to build up the 20% they needed. Now with this recent change, it could half the length of time they have to stay in their first property.

Investors
No change to investors, they will still have to bring 30% of the purchase price of the property with them.
So, if they are buying a property costing €300,000 and need to borrow monies to fund the purchase, they will personally have to contribute a minimum of €90,000 themselves.

Divorced/Separated/ Bankruptcy/ Insolvency

Another welcome change is how someone who falls into one of the above categories is treated.

They can now be classed as a First Time Buyer as long as they have no further interest in their previous property.

It was quite unfair that if they purchased a property with someone and that relationship broke down and they left what once was a family home, that when starting all over they had to come up with 20% of the purchase price.

Trying to get 10% together is a big enough ask, not to mind 20%, so re-classifying them was the right thing to do.

So, their income multiple will now become 4 times gross salary and the minimum they have to bring with them to the purchase is 10%.

Exemptions Percentage

Banks have been given flexibility by the Central Bank, which allow them to deviate from the rules, by 15% of their total lending in any one year to first time buyers and second/subsequent buyers. And they are being given this leeway to cater for individuals whose particular circumstances may give a bank some comfort to exceed the normal limits.
And 10% of their lending to investors can exceed the recommended limits.

A good reason to exceed the income multiple limits might be when an first-time buyer applicant has demonstrated a clear ability through monthly savings that they have the capacity to fund a mortgage which is maybe 4.2 times their gross income.
The changes were made after an 18-month review of the mortgage lending framework where the existing rules had been in place since 2015.

The Central Bank said of the changes made, ‘recognises the different roles played by different borrower types in the housing market.

They went on to say, ‘First time buyers have been shown to be lower risk in Ireland and are generally at an earlier point in the income lifecycle and more likely to experience income growth during their mortgage.’

Impact on the market

It’s likely the new lending rules will impact asking prices and the Central Bank has admitted themselves that they believe a ‘modest’ increase in house prices will result from the change. But only time will tell, how much of an impact if any it will have.

FTB’s can now look at properties that are about 14% more than they previously could but again, too early to know if this increase will be mirrored in asking prices.

I personally think a bigger impact on people making a commitment to buy will be rising interest rates and the sense that houses prices may be over inflated as it is.

Only a couple of weeks ago, the Economic and Social Research Institute (ESRI), said that they believe Irish house prices are overvalued by as much as 7% and they think the property market is likely to experience a sharp slowdown in the months ahead.

And if you believe that to be true, even if you can borrow 14% more, I don’t think it will make people rush out to buy a property. For some of course it will because they may have to, but my sense from speaking with would be buyers, is that they are going to sit in the fence for a while and see how the market plays itself out over the next six months.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie