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Mortgage income cap will lock couples out of market

Typical working couples will be approved for €100,000 less in mortgage borrowings under new Central Bank rules.

In a double whammy for homebuyers, as well as having to come up with a bigger deposit, thousands are set to have their property dreams crushed by the mortgage income caps.


Central Bank Governor Patrick Honohan

Central Bank Governor Patrick Honohan

Picture posed

Picture posed


Central Bank Governor Patrick Honohan

Controversy has centred on the size of deposits mortgage applicants will need, ranging from 10pc to 20pc of the home value. However, mortgage experts warn the limits on the amount of income buyers can use when calculating how much they can borrow is set to have a worse effect.

The size of the mortgage first-time buyers will be approved for will be limited to three-and-a-half times the income of the applicant, in most cases. This is known as a loan-to-income ratio.

Up to now, a couple on a combined €75,000 could have borrowed between €350,000 and €380,000, according to Michael Dowling of the Independent Mortgage Advisers' Federation.

The new rules mean the couple will end up being approved for €262,500. This is unlikely to be enough to secure a property in the Dublin area or Cork city. Most people earn less than €50,000, according to the Revenue Commissioners.

Mr Dowling said up to now banks assessed how much could be borrowed on the basis of the net disposable income. This is what is left every month to service a mortgage after taxes and paying standard household bills.

And banks are required to "stress test" applicants and can only approve the mortgage if the buyer can cope with interest rates going to 6.5pc, under the rules that are to be replaced with the new loan-to-income ratio.

Central Bank governor Patrick Honohan said: "I don't dispute the loan-to-income ratios are not liberal. They will certainly affect many people, but will prevent people from getting over-indebted."

"There are many major problems, but one which is new is the problem of over-indebtedness. Let's not get a new cohort or generation into that."

Mr Dowling, of the Independent Mortgage Advisers' Federation, said all the focus to date has been on the loan-to-value criteria, or the deposit required. "But I believe the income multiple change to a maximum of three-and-a-half times gross salary will have a greater impact on the market," he told the Irish Independent.

He said he has a number of clients, seeking a mortgage, who were shocked at how little they would now be allowed to borrow under the new Central Bank loan-to-income caps.

Construction Industry Federation director general Tom Parlon said the new rules would mean even fewer houses would be built.

"Unfortunately, we are now going to see a slow down in the delivery of new homes in these urban areas," he said.

The chairwoman of housing charity Threshold, Senator Aideen Hayden, said the new lending caps would push up rents, particularly in the greater Dublin area.

Asked about the new regulations, she said: "There is a very significant issue here. A lot of people who expected to buy will be renting. Rents are spiralling out of control and this will put pressure on housing."

And the Society of Chartered Surveyors Ireland, which represents a range of property professionals, said rents were up 11pc nationally and 15pc in Dublin in the last year.

Shane Stokes of the SCSI said: "The new rules are likely to result in more people renting because they cannot afford to buy and this will push rents up further."

But Prof Honohan denied that the new rules would negatively impact the rental market. He said the lending caps might encourage landlords to offer better quality rentals and longer leases.

And head of the Irish Mortgage Holders Organisation, David Hall, said the new mortgage rules protect banks most. Mr Hall, who assists homeowners in arrears, claimed borrowers will be tempted to get a loan from alternative legal or illegal sources to get bigger deposits. Those with larger deposits will need to borrow less, and so will not be so heavily impacted by the new loan-to-income restrictions.

Prof Honohan also said that about half of the houses being bought by first-time buyers in Dublin are below the figure of €220,000. However, property experts have questioned that.

The Central Bank received 157 submissions from public and private groups and individuals as part of a consultation process held late last year.

Nearly all the submissions from the banks were "unanimous" in their opposition to the measure on the grounds it was "too restrictive," the Central Bank said.


Taoiseach Enda Kenny said putting the restrictions in place was "not just about now, this is for the future".

When asked whether workers like teachers would be able to afford €25,000 or €30,000 deposits to get on the property ladder, Mr Kenny said: "It's always a challenge, but I think that's achievable. That's much better than walking into a situation where you were given a 100pc mortgage and find it's a millstone around your neck for the next 40 years."

Ulster Bank boss Jim Brown welcomed concessions made to first-time buyers to allow them to get mortgage approval with a deposit as low as 10pc for amounts up to €220,000.

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Irish Independent