Restrictions may bring stability but first-time buyers will pay

Controlling lending seems to make sense given our experience but it is sure to have undesirable results

Since the full extent of the credit explosion of the early 2000s was laid bare, there have been repeated calls to control and restrict lending. But now that the Central Bank has come out with proposed strict new mortgage lending restrictions, it doesn't seem as if anyone is happy.

First-time buyers say they won’t be able to save enough for a deposit; estate agents suggest it will kill supply and dampen the nascent recovery; those who bought recently fear the move will drive prices down again, raising the prospect of renewed negative equity; while banks are quietly considering their options.

But who’s got it right and what might the restrictions actually mean?

It’s important to note that the restrictions, which are due to come into place from January 2015, don’t ban all mortgage lending where a deposit is 10 per cent or less, or where a mortgage is greater than 3.5 times a combined income. Rather, the Central Bank has suggested it restrict this kind of lending to 85 per cent of a bank’s new lending book in terms of loan-to-value (LTV), and to 80 per cent for the income multiple.


In addition, the proposals form part of a consultation process and are not set in stone, but it’s hard to imagine the regulator not proceeding with its adjustments in some shape or form.

"Everyone knows it will come into effect – the question is what shape it will take," says financial advisor Trevor Grant of Select Mortgages.

Indeed, in its document, the Central Bank asserts: “While the regulations are not yet in place, regulated lenders are instructed to take account of the likely introduction of such a regime and to begin to adapt their lending practices already in anticipation of its introduction.”

For someone trading up, the LTV restriction may not be too onerous as they may have equity built up in their existing property. For first-time buyers (FTB) however, getting that deposit together may be more difficult.

In Dublin, the average price of a house is now around €242,600, or about €150,000 outside the capital. Based on the Central Bank’s proposals, this would mean that a first-time buyer would need to save almost €50,000 in Dublin, or €30,000 outside the capital for a deposit.

Douglas Newman Good chief executive Keith Lowe was at a house viewing on the Saturday following the announcement where, he says, potential purchasers argued that they were already struggling to raise the 8-10 per cent they need.

“They fear now they’ll be stuck in rented accommodation – literally handcuffed to their property,” he says.

An even tighter rental market is one feared outcome of the proposals, while borrowing the deposit is another option people might pursue – though this is never a great idea and will be difficult in any case given the general reluctance on the part of banks and credit unions for unsecured lending.

This could give rise to a situation where a first-time buyer with a hefty deposit from the bank of mum and dad can buy a home but their peers with less well-endowed parents will find themselves unable to do so.

“FTBs are saying, ‘how are we going to save that much, at a time when all that will happen is that rent will increase because of the shortage of properties,’” says Grant.

The income multiple is another cause of concern. In the aforementioned example, you’d need an income of €55,428 to qualify for a mortgage of €194,000 on the Dublin property, or €34,000 outside – manageable perhaps on a joint income but more difficult for a single person. And if the purchase price is higher, you’ll need a substantially higher income.

For Grant, assessing affordability based on an income multiple is “archaic”. “The banks moved away from that a long time ago,” he says, adding that a more effective measure is looking at net income – taking into account expenses such as childcare and debt repayment – and stress-testing this by two percentage points to allow for future increases in interest rates.

For Lowe, the proposals are akin to “using a sledgehammer to solve a smaller problem that they may see happening in the future”. He suggests that an income multiple of four, and an LTV of 92 per cent up to a loan of €300,000 might be a fairer way of looking at it

The response

Given the events of the past few years, few are willing to breach the parapet and suggest that the Central Bank is wrong to impose tighter lending limits.

“There clearly needs to be a limit on what people can borrow,” says Grant, who notes that he has seen on the other side of his business “how desperate people are” having gotten into too much debt. These examples include a couple who put a 30 per cent deposit into a house in the early 2000s but still found themselves in enormous negative equity.

While the banks have been quiet so far on the proposals, Felix O’Regan, director of public affairs with the Banking and Payments Federation, says that the proposals “will have a very significant bearing on the mortgage market depending on how the proposals pan out”.

“There is a considerable concern that many first-time buyers will be very challenged to get into property market,” says O’Regan, noting that about a third of mortgages issued in 2013 may not have gone ahead under the new proposals as they would have needed applicants to stump up another 10 per cent of the purchase price in deposit, which may not have been possible in all cases.

“There has been a nascent recovery in the mortgage market, but it’s still fairly fragile and interventions could have unintended consequences,” says O’Regan.

The proposals also presents non-bank lenders, such as new entrant Dilosk, with an opportunity to offer borrowers mortgages at higher income multiples and lower deposits.

And estate agents say it may have an impact on the current main bugbear of the market; supply.

“I don’t think it will stop people selling, but it has the potential to slow the market down a little bit,” says Lowe, noting that it may stop builders from going ahead with new developments.

“Ultimately builders will not build at the pace that they were going to build at,” he says, suggesting that rather than dampening down prices, the Central Bank’s restriction could in fact keep prices rising due to a further crunch in supply.

The prospects

While the full extent of the restrictions won’t be known until the end of the consultation process, those looking to get a first step on the property ladder should be contacting their banks now.

“I would be saying, get approved now,” says Grant, noting that mortgage approval today could see a first-time buyer effect a sale up to April of next year under the old rules.

As the Central Bank’s consultation document states: “if a regulated financial service provider has entered into a mortgage offer (sanction in principle) commitment before the date on which the LTV/LTI limits come into effect, the limits do not apply to that commitment.”

Already some first-time buyers are looking to take action before the clampdown.

“Our offices are being bombed with FTB. We’ve seen a massive uplift especially in west Dublin where people want to buy now,” says Lowe.

Experience abroad

As our table shows, Ireland is not the only country to introduce mortgage restrictions. Back in 2009, the UK financial regulator, the

Financial Conduct Authority

(FCA), began a review of the UK mortgage market, with a view to “reforming the mortgage market to ensure it is sustainable and works better for consumers”.

The result of this review, the Mortgage Market Review, was the publication of final rules in October 2012, and these came into effect in April of this year.

But rather than impose limits on loan-to-values or multiples of income, the FCA has sought to ensure that banks are adequately testing people’s disposable income before lending to them.

The banks responded and, in May, Lloyds Banking Group, the UK’s biggest mortgage provider, announced it would no longer lend more than four times the applicant’s income when the mortgage is for £500,000 or more.

Subsequently, in June, the Bank of England introduced its own credit controls, putting a limit on the proportion of mortgages a bank can issue with large loans relative to borrowers’ incomes. It opted to restrict lending at income multiples above 4.5 to no more than 15 per cent of a bank’s new lending for residential home purchases.

The Council of Mortgage Lenders says it expects moves in the UK to act as a “gentle dampener”, rather than a “hard brake” on the property market.

But restructuring the mortgage market is not just confined to the UK. At EU level, the Mortgage Credit Directive is in train, while other countries, such as Norway and Sweden, have introduced similar controls to the UK.

However, none of these countries have adopted a regime as stringent as that which the Central Bank has proposed.

First-time buyers' budget: DIRT relief and rent-a-room Last Tuesday would-be first-time buyers around the State tentatively awaited an announcement from Minister for Finance Michael Noonan that would help them secure their first step on the property ladder. When it came, however, it was less than beneficial they had hoped for.

The decision to exclude first-time buyers from DIRT on savings of up to 20 per cent of the purchase price of their first home is welcome, but it’s unlikely to make a significant impact on whether or not they will be able to save up the 20 per cent needed under the Central Bank’s new proposals.

The measure is expected to cost €2.8 million in 2015, indicating that the Government expects first-time buyers to save almost €7 million towards buying their own home

Previously, the Minister had suggested that he would introduce some form of Government guarantee for first-time buyers, which would require them to save less – banks would lend based on a lower loan-to-value and the Government would step in to guarantee the gap.

No such announcement came last week, however, and the DIRT incentive is unlikely to generate a similar response.

Consider the example of someone saving €300 a month, or a couple saving €600. The best rate currently available is 4 per cent on regular savings from Nationwide UK (Ireland) which would see an individual earn €78 a year in interest; or a couple €156. Absolved of the requirement to pay DIRT, the net benefit to them would have been just €46 and €92 respectively, so a welcome, but by no means significant benefit.

What might be of more use to home buyers is the decision to increase the threshold for income earned under the rent-a-room scheme from €10,000 to €12,000 a year. This means that if you have a mortgage of €1,500 a month, and rent out two bedrooms earning €1,000 a month in the process, you won’t have to pay any income tax on this, and can use all the income to pay down your mortgage.

Have your voice heard: Make a submission If the Central Bank's new proposals are something you feel strongly about, you should ensure that your voice is heard. The regulator welcomes submissions from everyone – not just industry bodies and lobbyists.

The consultation closes on December 8th, 2014 and you can make your submission via:

Remember, however, that it’s likely that at some point the Central Bank will publish all responses to the consultation on its website, so be prepared for your comments to be made public.