The Central Bank’s lending rules dictate how much you are allowed to borrow for a mortgage, as well as how much you are obliged to save and provide in the form of a deposit. Each of these rules is dependent on income.
What are The Central Bank’s mortgage lending rules?
If you are looking into getting a mortgage, whether you are a first-time buyer or otherwise, the very first step you need to do is to make sure you are up to date with The Central Bank’s mortgage lending rules. In short; these rules dictate how much money you are allowed to borrow and how much money you need to provide up front for a deposit based on your income.
There are two main rules that you should consider:
1. Loan-to-income ratio
The Central Bank's rules restrict the loan-to-income ratio for a prospective property buyer to 3.5 times their annual income.
So, for example, if you earn €40,000 a year, you can buy a house with a maximum value of €140,000. If you’re buying with a partner who also earns €40,000, that amount doubles to €280,000.
Top tip: Note that there are exceptions; 20% of first-time buyer mortgages can be above the 3.5 times your income cap and from January 1st 2018, 10% of second and subsequent mortgages can be above the LTI limit.
2. Loan-to-value ratio
The second major mortgage lending rule relates to the loan-to-value ratios that lenders are permitted to offer. This refers to the percentage of the property’s value that you can borrow and how much of it 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 €280,000, you need to save €28,000 for your deposit before you can loan the remaining €252,000.
Similarly, if you are a second-time or subsequent buyer you would need to provide a €56,000 deposit before applying for the remaining €224,000.
Top tip: Note again that 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.
So, now that you’ve calculated how much you are allowed to borrow in theory, what next? In order to avoid becoming bamboozled during meetings with the bank or mortgage broker, it’s a good idea that you familiarise yourself with mortgage interest types and other mortgage related buzzwords you are likely to come across in your mortgage journey.
Want to learn more about mortgage interest rate types? Click here. The Help to Buy scheme? Click here. How about the advantages and disadvantages of different interest types? Click here.