Well, they're finally here. After months of speculation, frantic lobbying by interested parties and concerned visits to their bank by putative homeowners, the Central Bank has finally announced its decision. It's not what everyone may have wished for, but the new rules, which will restrict mortgage lending, have been announced and it looks like they are here to stay.
While the new rules give some much-needed certainty and clarity, there is also an element of confusion as to what exactly they will mean for those looking to move on or up the property ladder.
Indeed, one reader who visited a mortgage advisor in her local bank the day after the Central Bank’s announcement found the adviser less than clear as to how exactly the new regime might shape up.
In essence, the new rules mean that first-time buyers (FTB) can continue as they were, provided that the purchase price is less than €220,000 and the amount to be borrowed is not greater than 3.5 times their income.
Those looking to trade up will be hit harder, however, with a requirement to save a deposit worth 20 per cent of the property’s purchase price, and again a limit of 3.5 times applied to the mortgage multiple. But before you despair, it’s important to keep some perspective on the new mortgage lending regime.
THE RULES MAY NOT PUSH HOUSE PRICES DOWN
While the Central Bank has asserted that its rules are not aimed specifically at calming house price growth, for many this is likely to be an expected impact of the rules.
But what was the experience in Norway? In March 2010 the Norwegian regulator introduced loan-to-value (LTV) limits of 90 per cent to calm what many perceived to be a housing bubble. Eighteen months later, it pushed it back to 85 per cent, as well as introducing a stress test of five percentage point increases from the current level. But what impact did it have on house prices?
According to Rolf Mæhle, a senior adviser with Finance Norway, the representative body for the country's financial sector, since the rules were introduced in 2010 and later tightened, "nominal price growth has been quite stable, between 5 and 10 per cent" a year.
IT WILL COST YOU LESS TO BUY AS YOU’RE PUTTING MORE EQUITY IN
Irrespective of what impact the changes have on property prices, the simple fact is that the more equity you put into your property upfront, the lower the overall cost of the purchase price will be. This is because you will have to repay less money in interest, which will bring down the overall cost of borrowing.
Consider the example of a couple trading up to a house valued at €450,000 in Dublin. Under the new rules, they will require a deposit of €90,000 to complete that purchase. This means that on a mortgage of €360,000 over 30 years at 4 per cent, the total cost of borrowing (at a constant interest rate) will be €258,730. Add this to the purchase price and the total cost of the property is around €708,000.
Now consider someone buying with a 10 per cent deposit. In this scenario, the cost of borrowing will be €291,000, a hefty €33,000 more, pushing the total purchase price up to €741,000.
And your monthly repayments will also be less: €1,718 on a 20 per cent deposit versus €1,933 on a 10 per cent deposit.
THE NEW MORTGAGE LENDING LIMITS ARE NOT ABSOLUTE
Yes, first-time buyers and those trading up will only be able to borrow up to 3.5 times their salary, and the latter category will also need a deposit of 20 per cent to get a mortgage.
However, it’s important to remember that these limits are not absolute. Banks will have discretion to ignore these limits in 15 per cent of LTV cases, and 20 per cent of cases when it comes to the income multiple.
This means, for example, that one in every five mortgages approved by a bank may be offered on an income multiple of between 3.5 and five times, while one in every six-seven trader-up mortgages can be approved at an LTV of more than 80 per cent.
Indeed, as Karl Deeter of Irish Mortgage Brokers points out, an anomaly of the new lending regime is that banks will still be able to offer 100 per cent mortgages, provided that it's within the excepted limits.
How the system will work remains unclear. It’s expected that banks will have to account for these exceptions on a quarterly basis, which means that banks could estimate how many mortgages can be approved outside of the rules on a quarterly basis.
Once the bank has used up its exceptions, it’ll then “shut down for business” until the following quarter, says Deeter, meaning that this could result in certain applications being held over until the following quarter. “The bank will favour whoever has the most money and looks the best.”
So, if you’re working in a sector such as construction or retail, which have struggled in recent times, it may make getting an exception that bit more difficult.
It’ll also mean that you may pay a higher interest rate on loans where the LTV is greater than 80 per cent, to try and incentivise people to stick within the new limits.
THE WORST HIT MAY BE THOSE WHO BOUGHT DURING THE BOOM
While it’s possible to find positives for first-time buyers in the new mortgage regime, it’s difficult to put a positive spin on the situation many would-be trader-uppers are likely to find themselves in.
If you’re in negative equity and looking to trade up, you will be exempted from the rules but evidence would suggest that the much talked-about negative equity mortgage is actually in scarce supply. And if you’re just about at break-even point in your first property, with very little equity, trading up has become a lot more difficult.
Take the example of a couple who bought a two-bedroom apartment in Dublin at the height of the boom for €450,000 on a 90 per cent mortgage. Now with two children running around, the family has outgrown their space, and are renting out this apartment, and renting a house for themselves. Luckily, thanks to a low-cost tracker mortgage, they have managed to make the sums stack up on this. However, they would really like to buy a home for their family, and having diligently paid down their mortgage since 2006, they are finally in a position to sell as they are close to break-even in terms of the amount outstanding on the loan/sale price.
But the new rules are going to make this move a lot more difficult for them. While they have built up a nest-egg of €40,000 their desired home is closer to €400,000. Under the new rules, this will mean a deposit of €80,000. If, as has been suggested, the new rules slow house price growth and even depress prices to some extent, the couple won’t need to save as much to purchase. However, they will then be stuck on the other end of the property chain, as their apartment may fall back again into negative equity – and, as mentioned, such mortgages can be difficult to get. Moreover, the LTI of 3.5 per cent applies even to negative equity mortgages- and as the loan will be larger due to carrying the element of negative equity - the couple may not qualify for this either.
THE BANK OF MUM AND DAD WILL OPEN FOR BUSINESS
According to Maehle, since the introduction of the rules in Norway, four out of 10 first-time buyers now receive help from their parents or family – more than double the level it was three years ago.
While the relief granted to FTBs in the Irish rules may relieve the pressure on parents to contribute as much, those looking to buy in Dublin or trade up may lean on their family to help out, which could discriminate against those who simply don’t have this financial support. Not only that, but in a way it may also transfer the risk from the banks back on to the parents.
“The guidelines have obviously removed some of the risk from first-time home buyers – and the banks – to their parents/family,” says Maehle.
Another impact of the new rules is that it widens the disparity between those needing a mortgage to complete a purchase, and those who have enough cash to finance it and are therefore exempt from the guidelines. Since the crash, cash buyers have accounted for about 50 per cent of all transactions, and while this figure has since moderated, cash buyers are still making their presence felt. In the hunt for a family home, someone who can close the deal with a cash transaction, rather than depend on getting a mortgage, is likely to be favoured once more by vendors.