Mortgage lending limits: What will the new Central Bank announcements mean for you?

An easing of lending restrictions announced today will make a mortgage more accessible for first-time buyers

THE CENTRAL BANK has adjusted two limits on mortgage lending known as the Loan-to-Income limit (LTI) and the Loan-to-Value limit (LTV).

What will it mean for first-time buyers?

You can get a bigger mortgage relative to your income.

LTI sets a limit on the amount of money consumers can borrow relative to their gross income. This will move from a flat limit of 3.5 times income for all buyers to 4 times the gross income of a first-time buyer.

A person with a salary of €30,000 would previously have gotten a mortgage of €105,000 under the old LTI of 3.5, but can soon borrow approximately €120,000.

This means consumers will be able to borrow 14.2% more.

A borrower on a salary of €40,000 will be able to take out a mortgage of €160,000, while a person with €50,000 could get a mortgage of €200,000.

The Loan-to-Value limit (LTV) requires borrowers to have a minimum deposit before getting a mortgage, but for first-time buyers this has remained the same.

A deposit equal to 10% of the value of the value of the property is required.

Have first-time buyers been reclassified?

Borrowers who are divorced, separated or have undergone bankruptcy or insolvency may be considered first-time buyers for the mortgage measures if they no longer have an interest in the previous property.

The Central Bank has referred to this as a “fresh start” perspective.

First-time buyers who get a top-up loan or re-mortgage with an increase in the principal mortgage may be considered “first time”, provided the property remains their primary home.

This change will benefit former couples who have separated but have no choice but to live together due to difficulties in one person getting a mortgage in order to move out.

What changes will affect second-time/subsequent buyers?

Their LTI will remain at 3.5 times their income, however their Loan-To-Value limit has been eased, putting it on level with first-time buyers.

The minimum deposit for second/subsequent buyers will decrease to 10% of the property’s value.

Previously it was 20%.

When will the new rules come into force?

January 2023.

These changes come after an 18-month-long review of the mortgage lending framework, with the Central Bank saying it had examined the experiences of other countries alongside holding consultations with the Irish public and stakeholders.

Lending limits had been unchanged since 2015 after the Central Bank attempted to prevent another housing crash.

What will it mean for supply and demand in the housing market?

Opinions have been mixed.

Rory Hearne, a lecturer in Social Policy at Maynooth University, has accused the Central Bank of “letting people borrow more so prices remain high”.

Philip Farrell, co-founder at Offr, a website for viewing an bidding on property, believes that the decrease in the minimum deposit required has effectively already been wiped out by the increase in property in the past year:

“We are now seeing reduced activity from both sellers and buyers, with less properties coming to market and reduced numbers of bids being submitted to agents. It is likely that a percentage of potential sellers will now wait until 2023 to act.”

“From a buyer’s perspective, first-time buyers are still active. However, this is primarily driven by a lack of supply, despite the price of new homes increasing by 14% over the last 12 months. Also, these new measures will not take effect until 2023. Loan-to-value ratios will not change.”

However Joey Sheahan, head of credit at online broker MyMortgages.ie, is confident that the changes could help drive down house prices, saying that developers won’t build houses if no one can get a mortgage to buy one.

“There are concerns that many developers are struggling to deliver homes at prices within the current limits and that a significant number had deferred building until the maths made more sense.

“In order for new housing developments to be viable for the developer, they need to reach certain price levels. With people having more affordability now – being able to get bigger mortgages – it would mean that more buyers and more new housing should increase the supply of housing.”

He does believe however, that there will be a lag between the building of these new homes and the limited supply of existing houses being bought up by first-time buyers who will soon be able to afford those mortgages.

“The firepower of purchasers coming in January is going to be stronger. So if we have the same amount of properties in January, then that will put upward pressure on prices.”

“It could increase the short term pressure on the market.”

Banks could usually give exemptions to about 20% of first-time buyers – has this now been reduced?

Technically. The exemption was based on 20% of the volume of the total of a bank’s mortgage lending.

This has been reduced to 15%, meaning that less exemptions can be given but this will mostly be balanced out by the change to LTI limits.

Less people will seek an exception allowing them to take on more debt, when the amount of debt they can take on has already been increased from 3.5 times their income to 4.

Banks could give exemptions to some customers of around 4.5 times someone’s income – has this changed? Can banks now give an exemption of 5 times someone’s income?

It is possible for banks to give exemptions significantly higher than the LTI set out by the Central Bank, but uncommon.

Once a bank’s own credit criteria has been met, there is no limit on paper to giving large exemptions on an infrequent basis, Sheahan said, but there is no reason to do so.

“A couple earning €100,000 each, with no loans and no dependents could borrow five times their income whereas a couple of €50,000 probably wouldn’t qualify for that,” he explained.

He added that before today’s announcement, AIB for example, would not lend more than four times a person’s income even if they decided a borrower was worth an exemption.

That could potentially increase, but not drastically, experts say.