08 Oct 2014

Mortgages: Central bank lending crackdown will spark mortgage rush

Filed under: Business News

Mortgage and property experts say a stampede of buyers is set to result from new Central Bank rules due to come in next January.

The rules mean it will be standard for buyers to need a 20pc deposit before getting a mortgage.

First-time buyers will have to come up with a €60,000 deposit for a €300,000 property. And an income of close to €70,000 would be needed to qualify for this. The Central Bank will insist banks only give out a tiny number of mortgages where the buyers have a deposit of less than 20pc of the value of the property.

Experts said that the new rules could cool the over-heating Dublin property market, but will make it more difficult to get a mortgage.

From next year, banks will also have to restrict the number of mortgages they issue where buyers use a high multiple of their income to work out how much they can borrow.

The regulatory authority said most new buyers will be restricted to using 3.5 times their income to assess how much they qualify to borrow.

In the case of buy-to-let properties, no more than one-tenth of the value of all new loans should be issued where the deposit is less than 30pc.

The proposals are subject to a consultation process, but are likely to become mandatory.

Michael Dowling of the Independent Mortgage Advisers’ Federation said the lending crackdown would lead to a rush of buyers anxious to complete deals before January.

“There will be a stampede of panicked buyers anxious to close deals before the new restrictions come in,” Mr Dowling said.

“After that, a whole generation of potential first-time buyers will be shut out of the market.

“I don’t know any first-time buyers who have saved more than a 10pc deposit, unless mammy and daddy are helping them out.”

Parents would turn to credit unions to get a deposit for their children.

He said banks should go back to taking out insurance to cover higher loan values, known as a mortgage indemnity bond.

Chief executive of the Institute of Professional Auctioneers and Valuers Pat Davitt also said middle-income people would be squeezed out while those with access to cash through their parents or through other sources would benefit.

Head of the Irish Brokers Association Ciaran Phelan said the lending restrictions were crude and will only create their own challenges.

“These restrictions are an easy measure for the State to implement without out having to deal with the greatest issue facing the Irish mortgage market, which is the lack of supply.”

Broker body PIBA claimed the initiative has very little to do with consumer protection and all to do with lender protection.

But Frank Conway of the Irish Financial Review website said the new measures did not go far enough.

The Central Bank should also restrict the availability of “super-term” mortgages, that is loans where the loan term exceeds 30 years, he said.

Such loan types have an incredible capacity to reduce monthly repayment while allowing mortgage applicants to squeeze into more restrictive Central Bank guidelines.

And he said interest-only loan facilities were also ignored.

The Central Bank said people were more likely to get into mortgage default where they have a small deposit and borrow a lot of money.

Deputy Central Bank Governor Cyril Roux said: “These measures have been carefully considered and, taking past experience into account, are being introduced at an appropriate time to ensure borrowers and lenders can withstand potential economic or property market shocks in the future without financial distress.”

He said the measures would ensure prudent lending by banks.

“We will continue our close supervision of lenders and have set out clear monitoring requirements which will apply,” Mr Roux said.

“Lenders and borrowers will be less likely to fail and it will be less costly if they do.

Central Bank figures show home loans worth €2.4bn were given out last year.

Around €1bn of that was connected to mortgages where the deposit was less than €20pc of the property’s value – above the proposed value limit.

Around €550m was connected to mortgages worth more than 3.5 times the borrower’s income – above the proposed new income limit.

The Central Bank’s Stefan Gerlach, who is also a deputy governor, said the proposals were not designed to limit or steer house prices, but added that this is likely to be a side effect of the measures.

“These things do work well if introduced early, before a bubble gets going.”
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