Do we have to pay a penalty for topping up our mortgage?
Q&A: Dominic Coyle
The Central Bank changed its mortgage rules for first-time buyers this week. Photograph: Matt Kavanagh.
We were first-time buyers when we bought our house in 2014 – before the new Central Bank rules came in and so only had to have an 8 per cent deposit.
It is an old house built in the 1950s and needs some renovation. We also hope to extend it. So, this year we went to our bank – after getting planning permission – to apply for a top-up.
They would only lend us 80 per cent of the value of the finished extended house. So, as well as needing a 20 per cent deposit/equity on the top-up, we also needed to find an extra 12 per cent of the original purchase price.
I searched for some guidance from the Central Bank on how to treat top-ups under the new rules but have had no luck.
Have the Central Bank included any commentary or guidance on top-ups in the updated rules?
Mr R.M., Galway
This sounds perilously close to retrospective enforcement. You complied fully with the rules in place when you first took out a mortgage to buy this property and, presumably, you have been successfully meeting your mortgage payment obligations since.
Otherwise, I assume, a top-up would not even be on the agenda from your perspective or that of your bank.
As it is, you’re looking for a top-up to renovate and extend.
Clearly, under the rules, you would be expected to provide 20 per cent of the value of any new project yourself by way of a deposit. That’s fair enough.
But now, the bank is also demanding that, to secure the top-up, you also provide from your own resources a further 12 per cent of the value of the home.
And worse still, it is not 12 per cent of the value at the time you bought it in 2014 but 12 per cent of the present, possibly higher, value of your home.
It sounds incredibly unfair, but the bad news is that the Central Bank has confirmed to me that your lender is acting precisely in accordance with the rules now in place.
They said the mortgage as a whole would be deemed an “existing mortgage” and that the total mortgage after the top-up “should not exceed the LTV [loan to value] requirements”.
Thus, in your case, after the top-up, the loan should amount to no more than 80 per cent of the post renovation/extension value of the house.
And even though that original loan – now deemed to come under the new rules – was as a first-time buyer, you do not get to benefit from the less onerous rules allowing first-time buyers to secure mortgage finance for up to 90 per cent of the value of the property.
Under the top-up, you will also be bound by the 3.5 times loan-to-income ratio.
All in all, this could severely restrict your ability to raise money for your planned renovation and extension.
The mortgage lending rules are in place to prevent excessive borrowing that would put homeowners into a vulnerable position financially.
Seeing as how you are managing your existing mortgage liabilities comfortably enough to consider further borrowings, you don’t appear to be vulnerable but are likely to find yourself working under the new rules regardless.
This guidance from the Central Bank is likely to alarm a lot of people who would have been considering a mortgage top-up but who certainly would not be in a position to back finance a further substantial portion of their underlying mortgage.
The only glimmer of good news is that there is provision under the Central Bank for lenders to provide funds in excess of the guidelines in relation to 20 per cent of the loans they make from January 1st.
Given your circumstances and your apparent comfort in carrying your current mortgage liabilities, you should urge your lender to treat you with this category of exceptions.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to email@example.com. This column is a reader service and is not intended to replace professional advice.