It’s Mortgages Week here at bonkers.ie and we’re taking a close look at the entire mortgage process in Ireland and answering your questions. Yesterday we kicked off by covering the differences between fixed and variable mortgage rates and today we’re going to tackle an area perhaps even more fundamental to the mortgage process - The Central Bank’s lending rules.
What are The Central Bank’s lending rules?
Whether you are a first-time buyer or otherwise, if you’re looking into applying for a mortgage, the very first step you must take on your journey is to make sure that you’re up to date with The Central Bank’s mortgage lending rules.
In short, these rules dictate how much a prospective property buyer is allowed to borrow for a mortgage, as well as how much that buyer is obliged to provide up front in the form of a cash deposit. Each of these rules is dependent on the buyer’s income.
How much am I allowed to borrow according to the lending rules?
To work out how much you are allowed to borrow, you need to consider your loan-to-income (LTI) ratio. The Central Bank’s rules state that a prospective buyer can borrow a maximum of 3.5 times their annual income.
So, for instance, if you earn €35,000 a year, you can borrow a property with a maximum value of €122,500. If you’re buying a property with a partner, you can add their annual income to your income to increase the amount you’re allowed to borrow. So, say your partner also earns €35,000, the amount you’re allowed to borrow doubles to €245,000.
N.B. It’s important to note that the banks have the option of going above the 3.5 LTI cap for 20% of the total value of lending in a calendar year.
How much do I need to provide for the deposit?
The second major mortgage lending rule relates to the loan-to-value (LTV) ratios that lenders are permitted to offer. These refer to the percentage of the property’s value that you can borrow and how much you must pay for up front, in the form of a deposit.
As of January 1st 2017, first-time buyers are allowed a 90% loan-to-value limit, meaning that they are required to provide a deposit of 10% up front for any property. This percentage goes up to 20% for second-time and subsequent buyers.
Continuing on from our example above, this means if you are a first-time buyer and you want to buy a house for €245,000, you need to save €24,500 for your deposit before you can loan the remaining €220,500.
Similarly, if you are a second-time or subsequent buyer you would need to provide a €49,000 deposit before applying for the remaining €196,000.
N.B. Of course, again there are exceptions; 5% of the value of new lending to first-time buyers will be allowed above the 90% loan-to-value limit and 20% of the value of new lending to second-time and subsequent buyers will be allowed above the 80% loan-to-value limit.
Originally introduced in February 2015 to prevent the Irish property market from overheating, The Central Bank’s lending rules have been the subject of much controversy since. The original version of the rules were more restrictive and on the back of a lot of criticism were changed slightly at the beginning of this year to the current version discussed.
It remains to be seen whether or not these new changes will have the desired effect but we live in hope! As we all know, Irish property trends are notoriously difficult to predict.
Curious to find out more? Come to our workshop
As part of Mortgages Week, we’re hosting a First-Time Buyers Mortgage workshop this Thursday (June 29th) at 6pm to explain the mortgage process to prospective property purchasers in a relaxed, friendly setting.
The event will take place in The Dean Hotel in Dublin and is completely free to attend. It’s fully booked now, but if you’re interested in attending, just add your name to the waiting list and we’ll let you know if there are any cancellations.
At the event will be our good selves, a qualified financial advisor and a mortgages protection insurance expert.
Facebook Q&A, Friday at 1pm
Mortgages Week will culminate in a live Q&A session on our Facebook page at 1pm on Friday.
During the Q&A, we’ll answer the questions you send us over the course of the week, share our top mortgage tips and reply to your comments and questions there and then!
We look forward to hearing from you this Mortgages Week and hope that you take the opportunity to ask the questions you’ve always wanted to ask.