The surge in the cost of living is making it harder for prospective homebuyers to get approval for a mortgage.
Would-be borrowers have less money to cover a home loan after paying household bills, so banks and other lenders are limiting the amounts they will approve to buyers and switchers. They are also factoring in record European Central Bank rate rises, which are adding to the affordability squeeze.
The tighter lending criteria come at a time when property prices continue to increase – they rose by 13pc in the year to July, according to the Central Statistics Office.
ECB rates rose by 1.25 percentage points in the past three months, with additional aggressive hikes expected.
Rising rates mean lenders are now stress-testing borrowers to assess their ability to keep up with higher monthly mortgage repayments. A stress test is a measure of how a person’s finances will hold up if their circumstances change for the worse.
It means that someone applying for a mortgage at 3pc is being stressed-tested on the basis the interest rate will go to 5pc, Martina Hennessy of broker Doddl.ie said.
Higher interest rates mean higher monthly repayments, and record inflation results in borrowers having less disposable income.
Stricter net disposable income requirements mean every extra €50 to €70 a month in costs for a single income family reduces the amount they can borrow by up to €10,000.
Borrowers are being told that even though they can borrow a certain amount based on the income limits set by the Central Bank, the impact of cost-of-living increases on disposable income are trumping this.
Not all borrowers are affected, but the cost of living rises are proving problematic for many first-time buyers and switchers, particularly single people and single-earner families, Ms Hennessy said.
Soaring household costs are combining with higher interest rates, with the result that people have less money left over to live on, so what they can afford to repay on a mortgage decreases, thus limiting the overall amount they can borrow.
The tighter disposable income tests providers are imposing are particularly difficult for single applicants and couples with children – lenders factor in monthly costs of around €250 per child.
Permanent TSB and Bank of Ireland have recently tightened their lending criteria. Finance Ireland has also imposed stricter net disposable income requirements.
ICS Mortgages last month imposed stringent limits on its lending, and Avant Money and Finance Ireland have announced large mortgage rate hikes.
Broker Michael Dowling said most banks and other lenders had adjusted their net disposable income allowances in the past two weeks.
“The impact of rising costs like energy means the disposable income borrowers have after paying a mortgage has changed,” he said.
Mortgage providers are stress-testing at different rates. Some are testing to see if borrowers can cope with rates rising to 6.5pc, with others testing if borrowers can repay if rates hit 5pc.
This is because some providers are adding 2pc over their fixed rate, with other stress-testing to see if a borrower can cope if rates rise by 2pc over variable rates.