The Central Bank of Ireland is reducing the number of second-time and subsequent buyers that will be able to borrow more than 3.5 times their income in 2018.
If you’re looking to buy a house in 2018, at some point you’ll need to get to know the Central Bank’s mortgage lending rules.
In short, the rules dictate how much money you can borrow when buying a house and how much of the property’s value you have to provide up-front in the form of a deposit.
Last year, the Central Bank made a number of significant changes to the rules for 2017, but have decided to only make minor tweaks for 2018.
Before we look at those, let’s take a quick look at the rules as they apply today.
What are the Central Bank’s lending rules?
The Central Bank’s mortgage lending rules set the loan-to-value ratio and loan-to-income ratio for borrowers.
Loan-to-value ratio refers to the proportion of a property’s value that can be borrowed and the amount that must be provided up-front in the form of a deposit.
On January 1st 2017, the Central Bank set the LTV ratio for first-time buyers at 90%, requiring them to provide a 10% deposit when buying a home.
The LTV ratio for second-time and subsequent buyers is 80%, meaning that they need a 20% deposit when making a property purchase.
Loan-to-income ratio refers to the amount of money a prospective buyer can borrow, as it related to their annual income.
The LTI for all buyers is 3.5, meaning that if you earn €50,000 a year, you can borrow a maximum of €175,000 (50,000 x 3.5) when taking out a mortgage.
Banks are allowed to make a number of exemptions to the rules for certain borrowers every year. And that’s where the Central Bank has made changes for 2018.
What changes are being made to mortgage lending rules for 2018?
From January 1st 2018, banks will see a reduction in the number of exemptions they can make to the 3.5 loan-to-income cap for second-time and subsequent buyers.
Up until now, the Central Bank has permitted banks to make LTI exceptions for 20% of their total loans in a calendar year, but next year they will only be able to make these exceptions for 10% of second-time and subsequent buyers.
First-time buyers will not be affected by this change.
The Central Bank also allows exceptions to the loan-to-value ratio of up to 5% for first-time buyers and up to 20% for second-time and subsequent buyers.
How will this affect the Irish mortgage market?
The Central Bank’s tweak to its mortgage lending rules will make it more difficult for second-time and subsequent buyers to get a relatively large loan.
However, things have improved somewhat for prospective purchasers over the last few months, as a number of banks have cut rates.
AIB and Haven cut their standard variable rate for new and existing customers and EBS, Bank of Ireland and Ulster Bank all recently cut rates for new customers.
It’s unclear what impact the Central Bank’s tweak will have on the mortgage market as a whole, but the Central Bank points to the fact that the change allows it sufficient flexibility to react to risky lending, should it develop.
