The Central Bank of Ireland has just proposed new regulations that would affect how banks manage mortgage lending.

The big news for home buyers is that they will be expected to have saved 20% of the value of the home – most mortgages should be for no more than 80% of the value of the property (“loan to value” or “LTV”). In addition to this, most loans should be for no more than 3.5 times the value of the borrower’s gross annual income (called “loan to income”, or “LTI”).

So, for example, a couple with combined gross annual salaries of €70,000 could get a loan for €245,000, and would need to have €49,000 in savings.

The key word here for many may be “most”; the banks are allowed to be flexible and to use their own discretion in some cases. The guidelines allow the banks to allow 15% of applicants to borrow more than 80% of the value of the property, and 20% to borrow more than 3.5 times their income.

The LTV and LTI rules will not apply to the following situations:

  1. Re-mortgages, or “switcher mortgages” where no extra capital is being released. However, if you are hoping to re-mortgage in order to release equity from your property, then the LTV rule will apply; so the mortgage can’t rise to more than 80% of the value of the property.
  2. Mortgages in arrears, where a re-mortgage or other arrangement is made in order to resolve the situation.

The LTV rule will not apply to credit granted for the purpose of discharging a residual debt from a negative equity mortgage; this refers to situations in which you sell your house and the sale price isn’t enough to pay off the mortgage, in which case the bank turns the unpaid portion of your mortgage into a personal loan. So, if you are hoping to get another mortgage and are saving to buy a new home, your old negative equity loan won’t be included in the new calculations.  This is designed to give people who can manage to save enough a second chance at owning their own home.

If you are planning to buy a property to let it out, then the LTI rule will not apply. However, you will have to provide 30% of the property value in cash, as the LTV must not exceed 70%.

Even if they are formally introduced, the banks will not be bound absolutely by these regulations. Certainly, they will be required to show that they are not lending in the kind of unsustainable way that happened in the past. However, from a borrower’s point of view, if you can negotiate successfully with the bank to borrow, for example, 85% of the value of the property you hope to buy, then this will be perfectly acceptable.

For now these are only proposals. The Central Bank of Ireland states that it expects that banks will begin to alter their policies immediately in preparation for the formal introduction of the regulations – the banks may have other ideas. It does seem likely that the proposed rules, even if they do prove to be applied flexibly, will have some influence on the market, and certainly prospective borrowers will need to bear them in mind when making plans.

(The CBI’s own information about the proposed regulations is here).

 

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Principal, Claire McCarthy Solicitor

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