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New rules to 'help a generation avoid over-indebtedness'

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It now seems that our faith in property is once more in full flight.

It now seems that our faith in property is once more in full flight.

It now seems that our faith in property is once more in full flight.

Changes to mortgage lending rules will have the least impact on first-time buyers hoping to get onto the property ladder, but they will be hit with a cap on the maximum mortgage they can draw down.

Central Bank Governor Patrick Honohan said the measures were designed to prevent future "property bubbles" and to help people avoid drawing down unsustainable mortgages.

"There was a broad acceptance of the desirability to do something of this type," he said.

"I was personally determined to arrive at a proposal that not only worked, but was generally accepted by the public.

"This is targeted at preventing a property bubble where people are borrowing and getting over-indebted and prices are running away from them."

Couples or individuals buying for the first time will have to provide 10pc of the value of the property as a deposit, up to a maximum of €220,000.

For properties above this amount, 20pc of the difference will have to be found. In addition, the maximum mortgage that can be drawn down will be 3.5-times gross salary.

For a house costing €100,000, a €10,000 deposit will be needed. The mortgage will amount to €90,000, meaning a salary of at least €25,715 a year is required to gain approval.

But the latest Daft.ie report says that the average cost of a new home across the State currently stands at €193,000, meaning the minimum salary required to secure a mortgage sharply rises.

In addition, people living in Dublin and the main cities can expect to pay well in excess of the national average, which means a higher deposit is required. For example, a relatively modest property in the capital can cost €300,000. This will require a 10pc deposit on the first €220,000 (€22,000), plus 20pc on the remaining €80,000, or €16,000.

In all, a total deposit of €38,000 is required, plus a mortgage of €262,000. A couple or individual would need an annual salary of €74,858 before approaching their bank seeking approval.

Mr Honohan said the cap on borrowings meant the new regime was "not liberal".

"Houses are expensive in Ireland. 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."

There are exemptions to the new rules. If the buyer has approval in principle - which the Central Bank says means a full credit assessment has been carried out - they will not be impacted by the new arrangements.

Banks are also allowed to exceed the limits in certain circumstances, where they believe the borrower is capable of drawing down a higher mortgage. This amounts to a pool valued at 15pc of all mortgages for homes issued in a year.

"These additional allowances are new. I think they're going to turn out to be quite important, but it means that hard cases can be resolved in the context of these allowances," Mr Honohan said.

But if a couple is buying - and one has previously purchased a property - they do not qualify for the lower deposit threshold.

Independent.ie Guide to House Prices in Ireland

We have surveyed estate agents in every corner of the country to bring you the most comprehensive guide to house prices in Ireland. Whatever type of home and area you are interested in, the details are just a click away using the links below. 

Irish Independent