Central Bank Mortgage Restrictions

The Central Bank issued their Consultation paper on mortgage restrictions yesterday. It’s called the Macro-prudential policy for residential mortgage lending and it sets out their proposals for residential mortgage lending in Ireland.

Background

1. 29% of loans issued in 2006 had a loan to value (LTV) of over 90%.
2. During the boom, almost 2/3 of mortgages were for over 3.5 times salary and 1/3 were for over 4.5 times salary.
3. The Central Bank recognise that property markets are cyclical. Their aim is to reduce the probability and depth of another property bubble.
4. As we are part of the EMU, the Central Bank are very limited in measures they can take to prevent another property bubble i.e. they can’t increase interest rates.
5. While they recognise that the banks aren’t the cause of the significant property price increases in Dublin, the Central Bank want to make sure the banks not lose the run of themselves again. The banks can’t be trusted to act sensibly, so lending restrictions have to be imposed.

Loan to Value (LTV) Cap

1. The maximum you can borrow will be 80% of the value of the house.
2. That means you will need a deposit of 20%.
3. There is an allowance where 15% of the banks lending over a 6 month period can be above the 80% LTV limit.
4. Any equity release or mortgage top-up that would bring the LTV above the cap, would be in the scope of the measure.
5. Exemptions:

• Switcher mortgages with no increase in the principle amount
• Mortgages in arrears
• Negative equity mortgages

Multiple of salary

1. Borrowers can get a mortgage for up to 3.5 times of their gross annual income.
2. There is an allowance where 20% of the banks lending over a 6 month period can be above the 3.5 times limit.
3. Any equity release or mortgage top-up that would bring the LTV above the cap, would be in the scope of the measure.
4. Exemptions:

• Buy to Lets
• Switcher mortgages with no increase in principle
• Mortgages in arrears

First Time Buyers

When this news was released yesterday, there was a lot of panic, especially from those trying to save for their first home. Property prices in Dublin are rising faster than people can save, so this seemed to be another blow for First Time Buyers.

However, lenders do have scope for 15% of their loan book in a 6 month period to have a LTV of over 80%. They can also give loans over 3.5 salary for 20% of their loan book in a 6 month period, so there is scope to still get a mortgage with a smaller deposit.

The banks lending criteria will still apply so make sure you meet all their criteria before applying for a loan. Have a look at our previous article on tips to getting a mortgage

Buy to Let (BTL)

1. The maximum you can borrow will be 70% of the value of the property.
2. There is an allowance where 10% of the lending over a 6 month period can be above the 70% LTV limit.
3. As there will be rental income for BTL’s, the multiple of salary restriction does not apply. If the borrower gets into financial difficulty, they can sell the property. With the 70% loan to value, the lenders exposure of not getting their money back is reduced.

Negative Equity Mortgages

1. There was 268,000 negative equity mortgages at the end of 2013.
2. The LTV restrictions have been exempted for negative equity mortgages.

What next?

1. These are only proposals at this stage and they are open to consultation up to 8 December 2014.
2. If they are introduced, there will not be a long lead in period. It is expected they will be introduced in January 2015.
3. The Central Bank will not allowed attempts to circumvent the regulations such as offering secondary mortgages to part finance the deposit.
4. If you have a mortgage offer or committed but undrawn amounts, these new restrictions will not apply.

If you have any questions in relation to the above, please contact me at steven@bluewaterfp.ie