Mortgage Lending Rules Eased: What does it mean for mortgage seekers?
2022-10-24The Central Bank of Ireland has announced an easing of the mortgage lending rules which will apply from 1 January 2023. The announcement is welcome as the new rules will allow more First Time Buyers to enter the mortgage market, and enable more Second and Subsequent Buyers to secure a mortgage.
What are the mortgage lending rules?
Introduced in 2015, the mortgage lending rules were set by the Central Bank to maintain financial stability and ensure that mortgage seekers do not over-indebt themselves by securing mortgages that they are unable to afford.
The rules set limits on the amount of money that can be borrowed to buy residential property, using:
- Loan to Income (LTI) limits, which limit the percentage amount you can borrow in relation to your gross income
- Loan to Value (LTV) limits, which sets a minimum deposit required to secure a mortgage.
What are the new rules?
After a comprehensive review which took place over 2021 and 2022, and public consultation, the Central Bank concluded that certain changes to the lending rules were appropriate. The changes that will come into effect next year relate to First Time Buyers and Second and Subsequent Buyers. Changes are also being made to the rules relating to the level of exemptions lenders may provide every year.
- First Time Buyers
In January 2023, the LTI limit for First Time Buyers is going to be increased from 3.5 times to 4 times. This means that First Time Buyers will be able to borrow up to 4 times their gross income for a mortgage, therefore allowing more First Time Buyers who are not in the higher income earning bracket to secure a mortgage.
For illustrative purposes, the following can occur under the new rules:
John and Mary, a couple currently paying monthly rental of €2,200, and who have total savings of €7,000 could, by availing of the Help to Buy and First Home Schemes, buy a new build home costing €450,000. Here’s how:
John’s income €40,000 p.a.
Mary’s income €45,000 p.a.
John and Mary would qualify for a mortgage up to 4 times their gross income, i.e. €340,000 over 35 years with a mortgage repayment of €1,350 (approx.) on a 5 year green rate mortgage (at present rates).
Property Funding
Mortgage €340,000
Help to Buy Scheme € 30,000
First Home Scheme € 80,000
Purchase Price €450,000
Their savings could fund other costs involved in securing a mortgage, such as solicitor’s costs and stamp duty.
Further, the new rules have expanded the definition of First Time Buyers. Previously, First Time Buyers were defined as mortgage seekers who had never before, either individually or jointly, purchased a house in Ireland or abroad.
In terms of the new rules, First Time Buyers now include:
- Individuals who are divorced or separated, or have undergone bankruptcy or insolvency, and who no longer have an interest in their previous property
- Individuals who want to re-finance or top-up their mortgage on their property. They will continue to be considered First Time Buyers provided the property remains their principal home.
- Second and Subsequent Buyers
The LTV limits for Second and Subsequent Buyers is being changed from 80% to 90%. Under the current rules, these buyers are required to have a 20% deposit when moving to a new home. However, under the more relaxed rules they will now be required to have a deposit of 10% to secure a mortgage.
This decreased deposit requirement is in line with the limits for First Time Buyers and will alleviate some pressure from Second and Subsequent Buyers who are saving for a deposit to purchase their second home.
- Mortgage Exemptions
Under the current rules lenders are allowed to provide exemptions to 20% of their customers every year. This means that lenders have the discretion to allow 20% of their customers to borrow above the LTI or LTV limits. This will, however, change when the rules come into effect.
As of 1 January 2023, lenders will be allowed to provide exemptions as follows:
- 15% of First Time Buyers
- 15% of Second and Subsequent Buyers
- 10% of Buy-to-Let mortgage seekers.
This change limits lenders’ discretion to offer mortgages that exceed the lending limits, but in light of the already increased LTI and LTV limits outlined above, this will not pose much of an issue for First Time Buyers and Second and Subsequent Buyers.
The extent of the difference that the new rules will make is not clear at this stage. However, on the face of it, the new rules will be beneficial to aspiring homeowners and Second and Subsequent Buyers whose ability to get a mortgage were limited by the current, more restrictive mortgage lending rules.
For more information on the forthcoming changes, contact us today.
Robyn Jacobs
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