Give me a crash course in . . . proposed new mortgage rules

What’s happening with mortgage caps?

The Central Bank of Ireland is reviewing its mortgage-limit proposals, which aim to damp down the property market. In October the bank – specifically its governor, Patrick Honohan – proposed new rules for mortgage lending. These severe-sounding and contentious criteria would compel homebuyers to put down a 20 per cent deposit. The proposed rules would also prohibit banks from lending any more than three and half times a borrower's gross income.

Is that still on the cards?

Talks are focused on amending the first proposal, and could see the introduction of a lower loan-to-value limit for first-time buyers. There is also discussion about phasing in the requirement for a higher deposit. In this case, a 15 per cent deposit would be required when the plan comes in, rising to 20 per cent over three or more years. What happens now?

At the moment there are no real rules about how much a bank can lend a would-be homebuyer, and banks are allowed to self-regulate.

Self-regulation and banks? Sounds terrifying

The banks have not covered themselves in glory in recent times, have they? Traditionally, Irish housebuyers have been able to get 90 per cent loans, but this rose to more than 100 per cent during the bubble years. And we know what happened after the bubble years.

Indeed. But what impact would these new rules have?

The Central Bank believes they would temper house price increases. Prices climbed by more than 20 per cent in some urban areas last year, and the Central Bank is terrified it will be accused of sitting on its hands while another property bubble inflates. More prudent lending rules would also protect homebuyers against property price falls in the future. And they would encourage people to save substantially before they took the plunge.

That sounds sensible

It might do if you are the governor of the Central Bank or already own the home you’d like to be carried out of in a box, but if you’re a first-time buyer the rules might not sound quite so sensible. If the measures are introduced, many who want to buy a home – even many sensible people with large deposits and well-paid jobs – will be excluded from the property market.

How so?

The average price of a home in Dublin is currently about €263,000. First-timers looking to buy at this price in the capital would need €52,600 up front. If someone could afford to put aside €500 a month and already has €25,000 saved, it would take them almost five years to save the rest of the deposit needed to buy that average-priced home. And, of course, if house prices increased by just 5 per cent each year, by the time they had saved the deposit, based on today’s prices, that house would cost more than €335,000.

Who will be affected?

Last year, 44 per cent of home loans were for more than the 80 per cent loan-to-value ratio proposed by the Central Bank. If the new proposals become policy, lenders will be allowed higher loan-to-value ratios in just 15 per cent of cases. Nearly a third of last year’s buyers would have been excluded, so tens of thousands would be hit.

Are the plans written in stone?

No. They are still proposals, and there have been objections from the Department of Finance, political parties, lobby groups and the Economic and Social Research Institute. When asked if the Central Bank’s proposals would be watered down, Honohan said: “The final decision will be taken on this in the coming days . . . and I wouldn’t like to anticipate that because I’m not the only decision-maker, but I hope my views will actually prevail.” The secretary general of the Department of Finance, Ann Nolan, told the International Monetary Fund conference in Dublin this week that the limits were not socially acceptable. She said she did not “think it should be a position where the only people who get on the property ladder are those who have parents who can give them a big lump sum”.

When will we know for sure?

The final plan is expected to be announced towards the end of next week.