Pat Davitt: Mortgage rules change good but more required
Published 27/11/2016 | 02:30
The entire removal of the €220,000 Central Bank threshold above which FTBs (first-time buyers) require a 20pc deposit on the excess over this amount came as something of a surprise, given the cautionary statements emanating from the regulator in the run-up to its first review of its own mortgage rules.
The Central Bank had asked for evidence-based submissions and the evidence was overwhelming. A Behaviour and Attitudes study IPAV commissioned with 10 other organisations found it typically takes six and a half years to save for a deposit under existing rules.
The new FTB 10pc deposit, regardless of house price, was the norm before the irrational exuberance that precipitated the financial crash. A FTB home priced at €350,000 will now need a deposit of €35,000 under the adjusted rules, down from €48,000. The 5pc of mortgage applicants who can borrow above this figure will help FTBs squeezed by the unchanged LTI (loan-to-income) threshold of 3.5 times gross income.
The unlimited 10pc deposit, or 90pc loan-to-value, change will assist buyers in Dublin and other urban areas who don't have the luxury of family support with getting a deposit together. And it will enable many to buy in urban areas rather than being forced into the suburbs simply to qualify for a mortgage.
Keeping the LTI (loan-to-income) threshold at 3.5 times gross annual income, as the Central Bank has done, will have little impact on those on higher incomes but it will remain an impediment for those on lower incomes and at the early stages in their earning capacity. They will have to continue renting at a time when Daft studies have shown it's cheaper to buy than rent in most areas of the country, even allowing for a 2pc increase in interest rates.
The recent Ulster Bank Construction PMI shows activity on housing projects rose at a sharp and accelerated pace during October. It's not clear whether this was boosted by the Budget announcement of a Help-to-Buy scheme for FTBs. If so it would indicate it has succeeded in engendering some confidence in house building. Confidence can be really powerful, an oversupply of it created the housing bubble, an undersupply prolonged the downturn.
The change to the mortgage rules will boost confidence in building. It may also assist in attracting more foreign lenders, improving competition. It is regrettable that non FTBs are still compelled to save a 20pc deposit. However, lenders can now treat 20pc of these applicants, up from 15pc, as special cases and apply higher LTV levels.
Those who bought during the peak have little if any equity in their homes. If they were enabled to trade up their current homes would become available to FTBs. And if the Government's Help-to-Buy scheme was extended to include second-hand properties, it would give momentum to supply, those now forced by market conditions into long-term rental would have more and better options open to them.
However, the issue of building costs and other impediments to supply needs to be urgently addressed by the Government before we see a return to what could be considered normality.
Pat Davitt is chief executive of Institute of Professional Auctioneers and Valuers