They’ve been blamed for the insane levels of traffic on the M50, for trapping people in the expensive Irish rental market and for Brooklyn not winning the Oscar (probably).
Yes, the Central Bank’s mortgage lending rules are about as controversial as an episode of Liveline presented by Roy Keane, Michael O’Leary and Conor McGregor after “a fair few pints of Bass”, to quote another controversial Irishman.
But why exactly are a small number of rules set in the boring banking buildings along Dame St causing such a stir? And what exactly do these rules say?
The Central Bank is the rule-maker for Ireland’s banks. One of its jobs is to determine what banks are allowed - and not allowed - to do when providing money to people looking to purchase property.
In February 2015, a new set of rules were introduced to help take some of the pace out of the market as it showed signs of overheating once again.
The rules brought about changes to the following:
1 – the amount of money you can borrow when buying a home
2 – the amount of money you have to provide as a deposit when buying a home
The loan-to-income ratio sets the maximum amount of money you’re allowed to borrow when buying a home, as it relates to your annual income.
The new rules state that you can’t borrow more than three-and-a-half times what you earn in a year when buying a home. This is to prevent people from taking a out a mortgage that they won’t be able to repay in the long-term and protects against unforeseeable changes to your circumstances, such as a job loss.
If you’re buying a property with another person, you can borrow up to three-and-a-half times your joint incomes. So there's a big advantage in finding someone willing to shack up with you.
It’s important to know that the banks generally only consider your base income when determining how much to lend. So, the likes of commission and rental income won’t be taken into account.
The Central Bank’s rules also set out the proportion of a property’s price that must be provided up front, and how much of it can be borrowed.
If you’re a first-time buyer you have to hand over a 10% deposit, up to the first €220,000 of the property’s value.
So, if you’re a first-time buyer getting a house for €220,000, you have to provide €22,000 up front and you can borrow the rest.
If you’re buying a house for more than €220,000, you have to provide a 20% deposit for the amount of the value that is greater than €220,000. Stay with me here…
For example, if you’re buying a house for €300,000, you must supply 10% of the first €220,000 (that’s €22,000) and 20% of the additional €80,000 (that’s €16,000).
So, by adding the two deposit amounts, we get the final deposit requirement of €38,000. That’s how much a first-time buyer has to hand over as a deposit when buying a house for €300,000. And he/she can borrow the remaining €262,000.
The rules are tighter still for non-first-time buyers. They have to provide a minimum deposit of 20% for a property purchase no matter what its value is.
So, if a second- or third-time buyer is trying to get the keys to a new €300,000 house, a deposit of €60,000 must be raised before the bank will consider providing a mortgage.
The relatively hefty deposits now needed to buy a home means that a lot of people can’t get on the property ladder, leaving them stuck renting. And that means landlords can increase prices and not suffer a tenant exodus, which in turn makes it even harder for someone to save up enough for a deposit. It's not a happy cycle for a prospective homeowner.
Starting to see why there’s so much criticism and controversy?
The counter argument is that, if deposit requirements were lowered and it was made easier to get a home, house prices would probably rise and might, just might, spiral out of control again.
And that’s something that nobody wants either.
The rules are set to be reviewed in the summer of 2016, but until then, expect the debate to run and run. And then run some more.
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