Tuesday 12 December 2017

Strict rules will make getting a mortgage more difficult

Financial Regulator and deputy governor of the Central Bank Matthew Elderfield

Charlie Weston Personal Finance Editor

HOPEFUL home buyers will find it more difficult to get a mortgage under strict new Central Bank rules.

They will now have to prove they can cope with a series of interest rate rises before a mortgage can be sanctioned.

The tighter rules -- effectively 'stress tests' on borrowers -- mean that someone getting a €200,000 mortgage will have to show they could bear up to €120 extra a month in higher repayments.

The tougher process emerged as bankers lashed out at Financial Regulator and deputy governor of the Central Bank Matthew Elderfield, pictured, who last week warned them to stop increasing variable mortgage rates.

Irish Banking Federation head Pat Farrell said he "wasn't comfortable" with lenders being told that rises in variable rates had to come to an end.

He said banks should be allowed to set their own rates.

Meanwhile, the new rules on lending criteria and how banks are to behave will be published by the Central Bank today.

It will make it almost impossible for ordinary people to take out an interest-only mortgage, whether it's to buy a home or an investment property.

Interest-only mortgages have been blamed for sending thousands of people into financial distress.

Up to 100,000 interest-only mortgages were taken out to purchase buy-to-let properties during the boom.

Large numbers of these people are now struggling to make repayments on their investment properties, with banks trying to get them to now also start repaying the principal. With an interest-only mortgage, you only repay the interest on the loan, until the mortgage term is completed. You then have to pay the principal amount, which has been accruing interest for years.

Only those who can demonstrate that they have the funds to pay off the principal at the end of the mortgage will get an interest-only deal. That will make it harder for people to get approval for a mortgage.

Home buyers will only be approved for a mortgage if they can prove that they would be able to cope with interest rates rising by 2pc.

The rulebook is one of 100 extra provisions in an updated Consumer Protection Code. Up to now there were only guidelines on mortgage lending.

With the clampdown on lending now in the code, lenders will find themselves facing tough sanctions if they do not observe the code.

Central Bank director of consumer protection Bernard Sheridan admitted the new lending "stress tests" would mean fewer people would get approved for a mortgage, and those that do get approval will be forced to borrow smaller amounts.

And borrowers will no longer get approval for mortgages if they only have a small deposit, as they will be thoroughly assessed to ensure the mortgage is suitable for them.

This will put an end to high loan to values, where people were borrowing up to 100pc of the value of the home.

Irish Independent

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