What do the Central Bank’s revised mortgage rules mean for me?

Q&A: Dominic Coyle

Central Bank chiefs Philip R Lane and Sharon Donnery announce changes to the bank’s residential mortgage lending requirements. Photograph: Reuters/Clodagh Kilcoyne

Central Bank chiefs Philip R Lane and Sharon Donnery announce changes to the bank’s residential mortgage lending requirements. Photograph: Reuters/Clodagh Kilcoyne

 

I am a first-time buyer. Regarding the Central Bank’s recent proposals, what is my position if I am thinking of purchasing a house worth €312,500? How much can the bank lend me in these circumstances? I have a 10 per cent deposit.

Ms A.F., email

Well, the good news is that a 10 per cent deposit is exactly what you are likely to need under the new mortgage lending rules for first-time buyers, which were announced last week by the Central Bank and which take effect on January 1st.

Before that date, slightly more complicated rules apply. For example, on a house or apartment worth €312,500, after January 1st you will need a deposit of €31,250 – 10 per cent. But if you are buying before the end of this year, you will need a bigger deposit. Until 2017, the rules state that you must have a deposit of 10 per cent on the first €220,000 of value and 20 per cent on anything above this. So, on your €312,500 home, you would need a deposit of €40,500.

For you, the new rules are much better. In your case, the bank can lend you 90 per cent of purchase price (€281,250), but only if you meet the other requirement, namely that the loan should not exceed 3.5 times your gross annual income.

So, for a loan of €281,250, the bank would expect you to have a salary of not less than €80,360, either by yourself or between you and whoever else is buying the property with you.

It is true that the banks can make exceptions and lend even more than this, but the Central Bank has said this can happen in only 5 per cent of cases, and most lenders will be reluctant to do so.

Of course, on top of the 10 per cent deposit which you say you have, you should also be entitled to claim a rebate of income tax over the past four years up to a maximum of €15,625 (5 per cent of the property price) under the new Help to Buy scheme being put in place.

If you are buying this year you will have to find that money up front and wait for the refund. If you are buying next year, it is easier as the money will be paid to the developer.

New houses only

All this assumes we are talking about a new build house. The Help to Buy scheme will not apply if you buy a previously owned property.

You can add the money from the income tax rebate to your 10 per cent deposit, reducing the amount you have to borrow from the bank.This could be helpful if the bank is of wary of lending you the full 90 per cent. That would mean you could secure a mortgage of €265,625 as long as the gross annual salaries of the prospective buyers was more than €75,895.

Or you can use it towards the minimum 10 per cent deposit required and save some of the cash you have already put aside to furnish the new home, or to provide a small rainy day fund.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.

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