Just over a year ago The Central Bank made changes to the mortgage rules affecting the purchase of a new family home. A year down the road, we can now bring you an update on:
- The Central Bank’s mortgage rule on Loan to Income (LTI)
- There rule on loan to value (LTV)
- The impact these rules have had on the mortgage/property market
- Whether you might qualify for an exception
Loan to Income (LTI)
The amount you can borrow to buy your new family home depends on how much you earn. The amount lenders across the board can lend is restricted by how much you earn. Currently the rate is 3.5 times your income. That said, there are certain lenders who will only accept your basic income before multiplying it by 3.5 and others who will take into account (to varying degrees) additional income such as bonuses, commissions, overtime and allowances.
What all of this means is that it is best to shop around if you are seeking your maximum mortgage amount.
Loan to Value (LTV)
On this point, the Central Bank has different rules for different borrowers – First Time Buyers vs Second Time Buyers (or those who have bought before).
First time buyers who are buying a property that costs €220,000 or less, can borrow up to 90% of the cost of their property. For amounts over this threshold, the loan to value is reduced to 80%.
For example a first time buyer is buying a house for €320,000. The deposit required is as follows:
- €0 – €220,000 @ 10% = €22,000
- €220,000 – €320,000 @ 20% = €20,000
- Total deposit required = €42,000
And in this scenario the mortgage on this house would be €278,000 (€320,000 – €42,000)
For people who are buying a bigger, second or subsequent property, across the board they are expected to place a minimum of 20% into the deal.
Therefore, using the figures an individual or couple buying a property for the second or subsequent time the deposit required will be:
- Purchase Price = €320,000
- Deposit @ 20% = €64,000
- Mortgage available = €256,000
Many would argue that the purpose of this rule changes was to reduce the likelihood of a future boom/bust housing economy. Boom/bust housing price rises had previously caused economic chaos and in many respects, the impact of this rule change has proved to be effective. Taking Dublin for example, where certain properties are still in short supply, prices have not seen the boom that might have taken place had borrowing been easier to access. However, one noticeable spin off from this rule change has been a splitting of potential borrowers into those who are able to access sizeable deposits and those who can’t. In certain circles, it is reported that parental gifts are playing a bigger part in the buying process than funds set aside by thrifty savers.
Might you be exempt? Or qualify for an exception?
Conscious of the risks of such a tight lending regime, The Central Bank has made certain exceptions in order to afford both struggling borrowers and keen banks the opportunity to find common ground.
The first situation is an exception to the LTI rule. There is some scope for banks to increase the LTI, but whether or not you could or would benefit from this exception is hard to quantify. In simple terms, The Central Bank has said that each bank can break the 3.5 times income rule for 20% of their new customers each calendar year. There is no limit on how much they can break the 3.5 times income barrier by, but the bank must still respect its credit policy and lending criteria. In reality, in certain circumstances, this could see borrowers being able to access up to 4.5 times income.
The second situation is an exception to the LTV rule. In this case, the banks have the capacity to break the rule for 15% of new borrowers, so long as they don’t go above the 90% figure. Given the level of deposits required this is the more sought after exception and banks are monitoring who they give these out to on a month to month basis. What we are finding is that banks are looking for customers to have found a property before seeking an exception – cart before horse, and are not (in general) giving exceptions at approval in principle stage.
In order to know if your case might slip through the net on these exemptions, it really is essential to shop around. Doing this on your own is tough and this is where a professional broker could make the difference between “deal” and “no deal” for you. The banks have capacity to implement these exceptions on a month by month basis, so if you’re a disciplined saver and can show that you have a sale agreed, then one of these exception approvals could have your name on it.
If you’d like to find out more about the current mortgage market or you would like help to secure the very best deal for your property purchase, why not get in touch?