Moving on with the new rules

The real impact of the latest lending restrictions will ultimately depend on where you want to buy, writes John Cradden

Parents who want to give their children a helping hand in the form of cash to beat the tough new mortgage deposit rules have been warned they are in danger of storing up a massive tax liability for their children when they are gone.

The Central Bank's recent moves to restrict residential mortgage lending may have been widely expected amid fears of an overheating housing market, but what will it mean for first-time buyers?

The new rules set a general loan-to-value (LTV) limit of 80pc, but for first-time buyers this rises to 90pc as long as the property they purchase is worth less than €220,000. If they buy a house worth more than this limit, then the 80pc LTV ratio will apply on any amount above €220,000.

So if a first-time buyer wants to buy a house worth €350,000, a deposit of €48,000 will have to be generated, (10pc of €220,000 plus 20pc on the balance of €130,000) along with stamp duty and other fees, whereas the same property would have required a deposit of around €35,000 before the new rules came into force in February.

However, this is still less than the €70,000 deposit needed if the 20pc rule applied across the board.

The Central Bank's new mortgage rules also imposed a maximum multiple of salary at 3.5 times a buyer's annual income.

Banks will be given some discretion in how they apply these rules. They will be allowed to exceed these LTV limits in 15pc of cases, and also to exceed the income limits in 20pc of cases.

Although it is early days, there are already indications that the market is cooling down a little (see panel).

Property buyer Carol Tallon of Buyers Broker said: "It is difficult to measure the effect as these changes are coming after a time of rush-buying for people who wanted to close prior to the end of last year, and now low stock levels.

"Those who wanted to or needed to buy did so before the end of last year, while the majority of other homebuyers are now waiting for new stock in their areas."

The real impact of these rules is likely to depend on where you want to live.

According to, the average asking price of a house in Dublin as of late last year varied from a low of about €216,800 in West Dublin to €455,000 in south county Dublin.

In Cork city, the average asking is €182,000, while in Galway city it's €177,280.

The cheapest part of the country to live is Co Laois, where the average asking is €88,780. Nationally, the average asking price is €193,000.

"In many parts of the country, €220,000 will be a sufficient budget to give a first-time buyer a wide choice of suitable properties, meaning that they can still borrow 90pc as before," says Liam Ferguson of financial advisors Ferguson and Associates.

"In some of the more expensive areas, particularly in the cities, a young family might find it difficult to find a suitable home for €220,000. If you're in the latter category, then you'll have to spend longer saving your deposit."

As a result, demand may fall off for suitable first-time buyer properties in some of the more expensive areas of the country, but this may end up causing a "double-whammy" effect for prospective buyers, says Mr Ferguson.

"If large numbers of people can't buy, then they'll have to continue renting for longer, putting pressure on an already squeezed rental market. So rents may go up, making it harder to save up the deposit."

Karl Deeter of Irish Mortgage Brokers said: "I think it will mean a lot of first-time buyers stay out of the market because they'll have to.

"In the past you often had loan-to-value and loan-to-income higher than what is allowed now. Even with exceptions, lenders will only go over on one of them (LTI or LTV) so people who aren't higher earners will not be able to borrow or they'll have to move far out to where properties are cheaper."

Mr Ferguson believes that the cap on multiples of salary won't have a major impact as lenders already stress-test applications to see how a borrower would cope with an extra 2pc or 3pc being added to the interest rate.

"In many cases, lenders' own criteria would result in loans of less than 3.5 times' annual income being offered, even before the new Central Bank rules."

However, the rules will at least put a ceiling on the overly-generous lending criteria of the past, he adds.

But Mr Deeter says that whatever impact the new rules have, it won't put a ceiling on prices.

"The Central Bank knows that it will make the financial system safer, that is true, but it doesn't stop prices rising and it will hurt a lot of people, but that was a trade off they were willing to make."

Government think-tank the Economic and Social Research Institute (ESRI) also took a dim view of the new rules, saying they were mistimed on the grounds that they would curtail supply and drive rents higher.

New lending rules kick in

The Central Bank's stricter new rules on mortgage lending were only implemented last February, but they were widely expected as they were put to a public consultation in October 2014.

On the evidence of the first two months of this year, they may already be having some effect.

Average house prices fell during this period, according to the Central Statistics Office (CSO), with prices nationwide falling 1.4pc in January, followed by 0.4pc in February.

Prices in Dublin fell 1.9pc in January - the most significant monthly fall since early 2012 - and by 0.4pc in February. But prices nationally are still 14.9pc higher than 12 months ago, while Dublin prices were still 21.4pc higher.

Several in the industry were betting on a more gradual phasing-in period for the new rules, with AIB and BOI saying there should be a three or six-month lead-in time, but the fact that there was a bit of a rush in buying activity towards the end of 2014 suggested that buyers were not expecting this.

Carol Tallon, of buying agent Buyers Broker, said "buyers were more prepared for the new lending rules than the professionals - it was widely believed the 'phasing in' period would be more generous.

How much can you borrow?

Often, too much emphasis is placed on how much we can borrow but we should always think carefully about how much we can afford to pay back, according Ciaran Phelan, the chief executive of the Irish Brokers' Association.

To determine this, banks will "stress- test" mortgage applicants to assess what impact interest-rate hikes would have on the repayment capacity of the borrower.

Both the lender and the borrower need to be satisfied of the borrower's ability to meet their mortgage payments. There is no point in securing a large mortgage if this leaves you financially exposed and ultimately stressed out on a monthly basis when you struggle to find the money for repayments.

Lenders will primarily consider two main factors when deciding the on mortgage-approval amount - load-to-value and income.

In January of this year new lending restrictions were introduced by the Central Bank to try to stem the steady increase in house prices in Ireland and to ensure that people don't fall foul of the same financial mistakes made during the Celtic Tiger - which left them financially exposed with huge mortgages on properties that had plummeted in value. These new lending restrictions are somewhat crude and the real impact is yet to be felt.

However, they are here and they will have to be adhered to by buyers and banks alike.

The new lending rules set out the limits as follows:

* Borrowing limit set at 3.5 times your gross income

* In terms of a deposit, you will need a 10pc deposit on properties costing up to €220,000

* For properties over €220,000, your deposit will be €22,000 plus 20pc of the excess over €220,000.

While there are some exceptions to these rules we would advise that potential borrowers take expert advice to find out exactly where they stand. Each bank will approach these rules differently - with some making certain offers to attracted "good" applicants.