In February of this year the Central Bank announced new rules for mortgage applicants
- What are they?
- How do the 15% exceptions apply?
- What effect have these changes had on the mortgage market?
Loan to Income Rule (maximum loan amount)
The first rule is a limit on the amount a bank can lend an applicant and is capped at 3.5 times an individual’s salary or 3.5 times the combined salaries for a couple. It is worth noting that each bank will treat bonuses, commissions and overtime differently so it is really worth speaking to a broker to ensure you are qualifying for the maximum you can get, if required.
Therefore under this rule a single applicant on a basic salary of €40,000 could expect a mortgage of 3.5 times their income – €140,000 and a couple on basic salaries of €40,000 and €30,000 (cumulative €70,000) could expect a to get mortgage of €245,000, assuming of course they meet the banks other mortgage criteria.
Now, here is the interesting point under the 15% exception i.e. where each bank is allowed break the rules for 15% of mortgage applicants at their own discretion, an individual or couple could get a mortgage between to 10 to 15% in excess of this depending on the bank. Once again each bank will apply different criteria when assessing customers, they will all be different and will assess customer’s based on net disposable income and debt service ratios.
This is not hearsay as last week we managed to get a single applicant with an accepted salary of €88,000 a mortgage of €340,000 – €32,000 more than the 3.5 rule!
Loan to Value Rule (minimum deposit required)
This states for all home movers or previous mortgage holders the max allowable loan on any new purchase should be capped at 80% of the purchase price, thereby requiring a minimum deposit of 20%. Therefore a purchase price of €300,000 would require a deposit of €60,000 and hence a maximum mortgage of €240,000.
Some leniency has been awarded to first time buyers and for them they require a 10% deposit up to a purchase price of €220,000 and 20% for amounts in excess of this. Therefore for first time buyers buying a house for €200,000 they will require a minimum deposit of 10% – €20,000.
For, first time buyers looking to buy a property for €300,000 they will need a deposit of 10% for the first €220,000 i.e. €22,000 and 20% for the remaining €80,000 (€300,000 – €220,000k) i.e. €16,000. This means that the total deposit required for first time buyers purchasing a house of €300,000 is €38,000 (€22,000 + €16,000) leaving a maximum mortgage of €262,000 (€300,000 – €38,000).
Under the 15% exemption only yesterday we secured a couple holding on to their existing home and buying a new home a mortgage of 84% on this new property
What effect have these had on the market?
So, three months on what are we seeing? For new mortgage applicants we are noting the majority of First Time Buyers are seeking mortgages between €200k and €300k and with that looking to purchase for between €220k and €360k. Most of these customers have the deposit from savings and parental gifts and in essence have not been adversely effected by the new rules.
For trader uppers we are noting slightly higher mortgage requirements and their deposits are coming from once again savings and parental gifts and in some cases equity from the sale of a property.
Those seeking to hold on to their family home as a buy to let (investment property) and purchase a new home are going to find it difficult under the new rules.
There are still a lot of potential buyers in the market who qualified under the old rules in January and February and hence have up to three months remaining on their mortgage approvals and it is only when these run out will we truly see what effect these new rules will have on the house prices, but as it stands there has been no decrease in mortgage applications.
Fran Cooke & Greg Cooke t/a All Financials is regulated by the Central Bank of Ireland
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Author: Fran Cooke