Central Bank mortgage rule change: What it means for you

Q&A: What is the impact in terms of cold, hard cash?

Central Bank rules on mortgage lending have been changed? I thought the rules were still new?

They sort of are. The Central Bank rolled out new rules restricting the amounts banks could lend to would-be homebuyers less than two years ago but said at the time that they would be up for review and that is what has happened.

Has anything major come out of this review?

Again, sort of. But it does depend on who you are and where you are on the property ladder or if you are on it at all.

What do you mean by that?

The big change has been for first-time buyers. From January of next year, the ceiling on the loan-to-value (LTV) ratio for all first-time buyers will be set at 90 per cent. The ceiling for first-time buyers now is 90 per cent for loans up to €220,000 and 80 per cent for the balance.

What does that mean in terms of hard cash?

A lot. Today, if a first-time buyer buys a house worth €400,000 they need a 10 per cent deposit on the first €220,000 – €22,000 – and a 20 per cent deposit on the remaining €180,000 – €36,000. That means a person buying a €400,000 house needs a total of €58,000.

On January 1st, the same buyer will need a deposit of €40,000, €18,000 less.

That is a big deal, what impact will it have?

It will allow more first-time buyers to get on the property ladder faster.

Where does the help-to-buy scheme fit in to all this?

Ah yes, the help-to-buy scheme, we nearly forgot the initiative to help first-time buyers announced by Michael Noonan in the budget.

Under it, the Government offers first-time buyers tax rebates of up to €20,000 on new homes valued up to €500,000.

Hang on, does that mean a first-time buyer now only needs a 5 per cent deposit?

Over the course of reclaiming the tax rebate, that is effectively what it means for houses up to €400,000.

Or at least that is what it means for a first-time buyer buying a newly built home. A first-time buyer in the market for a secondhand home will not get the benefit from the scheme but will benefit from the easing of the lending rules.

Um that’s good, right?

Um, maybe. If first-time buyers can get access to homes faster it will mean those trading up will be able to sell faster and might ease the pressure on the rental market.

So there are no downsides?

Oh, we didn’t say that. The relaxing of the rules could mean house prices are set to rise even further and faster. You would also have to feel sorry for people who bought starter homes at the height of the boom.

They are probably still in negative equity, will not get any help to buy from the State and still need a 20 per cent deposit if they want to move. One small glimmer of hope for this is that if their property is still in negative equity they are excluded from the rules.

Oh, right. Any other changes?

Yes. While the 20 per cent minimum deposit requirement, which means there is a maximum loan-to-value ratio of 80 per cent, continues to apply to second and subsequent buyers but banks have been given greater flexibility to break the rules.

What does that mean?

Under the new rules, 5 per cent of the value of new lending to first-time buyers will be allowed above the 90 per cent LTV limit, while 20 per cent of the value of new lending to second timers will be allowed to top the 80 per cent LTV limit.

This replaces the current requirement allowing 15 per cent of total lending to first-time buyers and second to top the LTV limits.

And what does that mean?

Well, high earners are likely to benefit from the slight relaxation.

If someone is earning a lot but does not have much savings they might be allowed borrow up to 90 per cent of the value of their property.