Wednesday 21 August 2019

'Trapped generation' hit by new changes to mortgage lending rules

Central Bank tweaks mortgage limits for those trading up

Governor Philip Lane launches the Central Bank’s review of mortgage lending requirements. Photo:
Governor Philip Lane launches the Central Bank’s review of mortgage lending requirements. Photo:
Charlie Weston

Charlie Weston

Second-time buyers have been hit by new changes to mortgage lending restrictions. Central Bank Governor Philip Lane left the rules much as they are, but he did make a slight adjustment to how the exemptions to the lending limits work.

This will largely hit the 'trapped generation' who are trying to trade up.

Most buyers will still be restricted to borrowing no more than three-and-a-half times their income.

First-time buyers will still be required to have a deposit of 10pc of the property's value, with a 20pc deposit needed by second-time, and subsequent, buyers.

But there are exemptions to the rules. Up to now, banks were able to allow 20pc of all borrowers an exemption from the income limits. This exemption did not distinguish between new and second-time buyers.

The exemptions allow the likes of a newly qualified doctor to avoid the income limit, as their income is expected to rise.

Rules too restrictive: Brokers Ireland’s Rachel McGovern
Rules too restrictive: Brokers Ireland’s Rachel McGovern

Now the regulator has said banks would be allowed to exempt only 10pc of second-time buyers from the income-limit rules.

However, banks will be able to exempt up to 20pc of first-time buyers from the rules, if they qualify for an exemption.

Read More: 500 first-time buyers a week get approved to take out mortgage

Lobby group Brokers Ireland said the changes made did not go far enough.

It said the existing rules remained too restrictive, especially for second-time and subsequent buyers, with good repayment capacity. It also claimed the limits are driving up rents.

But Prof Lane said this reflected the reality of lending at the moment, where new buyers often had the potential to earn more as their careers progress.

This meant they got an exemption more often than a second-time buyer.

"The larger allowance for above-ceiling lending to first-time buyers compared to second and subsequent buyers reflects the different characteristics of these two groups," said Prof Lane. "In particular, first-time buyers are typically younger, with current income levels lower, relative to expected future income levels."

It is not expected that the change to the exemption limits will lead to higher, or lower, overall bank lending.

But director of financial services at Brokers Ireland Rachel McGovern said there was no rationale for differentiating between first-time and subsequent buyers.

She said the 10pc deposit rule should apply to all buyers, not just first-time buyers.

"And the 3.5 times gross income is too restrictive and should be eased to 4.5 times income for all buyers," she said.

"Many who bought at close to or at the top of the market have been unable to move. As their negative equity diminishes and their housing needs change, the rules compel them to find 20pc deposit before they can move. That is a mountain too high to climb for many."

Brokers Ireland, which represents 1,300 broker firms, said the rules were good in principle, but were introduced far too early in the cycle, and had the effect of locking many out of the market.

"They have the effect of driving up rental prices, as we had predicted when they were introduced, to the extent that it has become cheaper to buy than rent in many parts of the country. The winners are cash buyers and investors, unfortunately," said Ms McGovern.

Irish Independent

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