What are the Central Bank's mortgage lending rules?
The Central Bank’s mortgage lending rules were introduced in early 2015 and have fundamentally changed the mortgage landscape in Ireland. The rules dictate how much you're allowed borrow for a mortgage in relation to your income, as well as how much you're obliged to save for a deposit, and are designed to ensure that financial institutions lend money sensibly.
Whether you're a first-time buyer or otherwise, if you're looking to get a mortgage, the very first thing you need to do is get up-to-speed with the Central Bank’s mortgage lending rules. In short these rules dictate how much money you're allowed to borrow in relation to your income and how much money you need to provide upfront for a deposit.
Despite pressure from both the banking industry and government for the rules to be loosened, they've remained largely the same since they were first introduced.
What are the Central Bank’s mortgage lending rules?
There are two main rules that you need to be aware of:
1. Loan-to-income limit
The Central Bank's rules limit the maximum amount someone can borrow to 3.5 times their annual income, regardless of how much they earn.
So let's say, for example, that you earn €50,000 a year. This means you're allowed borrow a maximum of €175,000 under the Central Bank's rules. If you’re buying with a partner who also earns €50,000, that amount doubles to €350,000.
However, in any one calendar year, 20% of mortgages that lenders give out to first-time buyers can be above this cap. For second-time and subsequent buyers, 10% of mortgages are allowed breach the loan-to-income rule. In these cases, often called 'exemptions', up to 4.5 times an applicant's income can be lent out in some cases.
2. Loan-to-value ratio
The second major mortgage lending rule relates to the loan-to-value ratios that lenders are required to observe. This refers to the percentage of the property’s value that you can borrow and how much of it you must pay for upfront in the form of a deposit.
It's often simply called 'the deposit rule'.
First-time buyers are allowed a maximum loan-to-value of 90%, meaning they're required to provide a minimum deposit of 10% upfront for any property. This percentage goes up to 20% for second-time and subsequent buyers.
Let's say, for example, that you're a first-time buyer and you want to buy a house for €300,000. The rule means you'll need a minimum deposit of €30,000 before you can be lent the remaining €270,000.
Similarly, if you're a second-time or subsequent buyer, you'll need to provide a deposit of €60,000 before applying for the remaining €240,000.
Note again that there are exceptions or 'exemptions'. In any one calendar year, 5% of mortgages to first-time buyers can have a deposit below 10% and 20% of mortgages to second-time and subsequent buyers can have a deposit below 20%.
How do I get a mortgage exemption?
Firstly you need to know that you can usually only get an exemption under ONE of the lending rules. It's extremely rare that a bank will allow you to breach both the loan-to-income limit as well as the loan-to-value ratio. It's either one or the other.
Whether you get an exemption will depend on your credit worthiness, the quality of your mortgage application and whether the lender still has room to give out an exemption.
Exemptions are often all used up by the middle of the calendar year, so if you want to apply for one, the earlier in the year that you apply for your mortgage the better.
Banks also tend to give exemptions to people on higher incomes, which means around €50,000 or above for a single applicant and €75,000 and above for a joint application.
Do the Central Bank's mortgage lending rules apply to switchers?
If you're thinking of switching your mortgage then the Central Bank's rules don't apply. However most banks won't let you switch if you're in negative equity and most will require you to have at least 10% equity in your home.
So, now that you know how much you're allowed to borrow in theory, what next?
In order to avoid becoming bamboozled during meetings with your bank or mortgage broker, it’s a good idea to familiarise yourself with some of the mortgage-related buzzwords you're likely to come across in your mortgage journey.
- Check out this guide to learn about the various types of mortgage interest rates.
- If you’re a first-time homebuyer you could claim a tax rebate of up to €30,000 with the Help-to-Buy scheme, which is designed to help first-time buyers acquire the deposit necessary to buy a newly built home.
- Fixed mortgage interest rates are becoming increasingly popular, however it’s important to understand the pros and cons of both variable and fixed rates.
- If you’re thinking about buying an energy-efficient home with a Building Energy Rating (BER) of at least B3 or higher, you could apply for a green mortgage. You can learn more about green mortgages in this guide.
Compare mortgage rates on bonkers.ie
Once you’ve become familiar with the Central Bank’s mortgage lending rules and mortgage terminology, you can compare mortgage rates on bonkers.ie.
When you decide it’s time to apply for a mortgage, you can submit an online enquiry through our new mortgage broker service and one of our experienced financial advisors will call you back to get your application started.
Our mortgage broker service is entirely free and is fully digital from start to finish, meaning everything can be carried out online from the comfort of your home.
You can learn about how your mortgage application will be assessed in this guide.
Get in touch
Do you have any questions about the Central Bank’s mortgage lending rules? We’re here to help with any queries you may have.