New mortgage rules mean most buyers to need 20% deposit

New mortgage rules published today by the Central Bank mean that most house buyers will have to have a 20 per cent deposit when applying for a home loan. The regulations come into force on January 1st.

The bank is proposing that no more than 15 per cent of all new mortgages for private dwelling homes should have a loan to value (LTV) ratio above 80 per cent. This means that most first-time buyers are now going to be expected to have at least a 20 per cent deposit when buying a home.

In addition, it has also decided that just one-fifth of new mortgages should be issued above a level of three and a half times income (LTI).

In the case of buy-to-let properties, no more than 10 per cent of the value of all new loans should have an LTV above 80 per cent.

The Central Bank's deputy governor Stefan Gerlach said these measures should help to avoid another property crash in Ireland and dampen the rate of price rise currently being experienced in the market.

“Our research has shown there is strong evidence that mortgage losses are much higher where borrowers have a high LTV or LTI rate,” he said. “We believe that measures such as these are a standard part of a well regulated financial system and introducing these precautionary measures should contribute to a stable and well-functioning mortgage lending market.”

The regulator said the income caps would be “more binding” than the LTV ratios in a period of boom as pay levels could never keep pace with soaring property prices.

The LTV caps are not “completely counter-cyclical” as loan values will rise in line with property prices.

Figures for 2013, show that of the €2.4 billion in home loans issued, 44 per centre breached the new 80 per cent LTV limit while 23 per cent were above the new income ratio.

In spite of this, the bank’s paper said there is little indication at present that bank credit has been an “important driver of the recent increase in property prices in Dublin, with the volume of new lending still very low”.

Figures for the first half of this year show that €1.3 billion was issued in new mortgages by lenders.

These new rules are proposed in a paper that is being issued to the banking industry as part of a two-month consultation process. The Central Bank hopes to introduce the new rules on January 1st.

Lenders will be required to submit regular data to the Central Bank to verify that they are operating within the new limits.

The regulator said it would use existing sanctions to punish lenders that breach its new rules.

The Central Bank said it does not wish to “regulate or directly control” housing prices in Ireland, which have begun to shoot up again this year, with a 25 per cent year-on-year rise in Dublin recorded in August.

The regulator said it believes the new rules to be “proportionate” and it expects regulated lenders to “take account of the likely introduction” of this new regime when issuing mortgages for the remainder of this year.

Certain exemptions are proposed to the new rules. These cover residual debt from home loans in negative equity, switcher mortgages, and home loans in arrears. Buy-to-let borrowers will also be exempt from the income restrictions.

Lending at high LTVs was a feature of the last crisis. Figures from the Central Bank show that the proportion of new loans issued at more than 90 per cent LTV grew from 14 per cent of loans in 2000 to 29 per cent in 2006, when mortgage lending peaked at €26 billion.

This led to large numbers of borrowers slipping into negative equity once housing prices turned and subsequently into mortgage default.