Explained: How Ireland's new mortgage rules will impact home buyers

The Central Bank has announced changes to the mortgage lending rules in place since 2015
Explained: How Ireland's new mortgage rules will impact home buyers

Tomas Doherty

The Central Bank has announced changes to the mortgage lending rules in place since 2015. How will this affect first-time buyers and what impact will it have on the wider market?

What changes has the Central Bank made?

The bank, which sets limits on how much banks can lend to potential homeowners, announced on Wednesday morning that it is increasing the amount some home buyers can borrow as a multiple of their income.

First-time buyers will be allowed to borrow up to four times their household income under the change.

The bank has also decided to broaden its definition of a first-time buyer to include borrowers who are separated or divorced or have undergone insolvency or bankruptcy and no longer have an interest in their previous property.

Until now, all home purchasers have had an upper limit on the amount they can borrow of 3.5 times their income.

That rule was introduced seven years ago when Central Bank bosses were trying to avoid a repeat of the 2008 property crash.

However, the regulator will continue to enforce a limit on most loans to second and subsequent home buyers at 3.5 times income.

While the bank had previously required most second and subsequent buyers to put down a 20 per cent deposit against a property to secure a loan, it has now decided to reduce this to 10 per cent.

https://www.youtube.com/watch?v=DIe6TngFpeE

When will the new rules come into force?

The changes will take effect from the start of January next year.

How will it affect homebuyers?

It is not immediately clear how the changes will affect the mortgage market. On paper, it means aspiring homeowners will see a 14 per cent jump in the amount they can borrow.

A couple with combined earnings of €85,000 could borrow €297,500 under the existing rules. With this change, that figure will jump to €340,000.

The lowering of the deposit to 10 per cent may also help some existing homeowners.

What is the reaction and what impact will it have on the wider housing market?

The announcement has been welcomed by many, but there is concern that the mortgage lending changes may stimulate the housing market and increase prices.

Central Bank governor Gabriel Makhlouf said there was strong public support for the changes, but that it was clear that affordability and access to housing remain the key challenges in Ireland.

"At the core of these challenges is the need to increase the supply of housing," he said.

Sinn Féin’s finance spokesperson Pearse Doherty described the easing of mortgage lending rules as a reaction to failures in Government policy.

He told RTÉ radio that it was unacceptable that people had to borrow €400,000 to buy a house in Dublin.

Trevor Grant, chair of the Association of Irish Mortgage Advisors, broadly welcomed the Central Bank's changes as likely to make a "considerable difference" to many homebuyers.

However, he said high demand and a chronic under supply of available housing was still the major underlying issue. "There is a concern that by increasing the multiple at this time it may increase prices until sufficient property supply is delivered," he added.

Martina Hennessy, managing director of mortgage advisory firm doddl.ie, said the changes may help some renters to get on the property ladder.

"This will just allow people to be able to borrow more, and for many to be able to get out of the current rent trap that they're in, where they're paying more in rent than they actually would be on a mortgage," she told Newstalk radio.

"While the rules are changing, and that will increase the ability for people to borrow more, it will still be under measured circumstances. The lender's own credit risk and lending policy will still prevail."

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