There is a lot of confusion around about the proposed mortgage changes that are due to come into force in 2015. The following is an article we are publishing in tomorrows edition of The Nationalist in the hope to give you the facts and to simplify it all. Intro In the last week, the Central Bank has reacted to the recent property price increases in the market by bringing forward a number of proposals for public consultation. These have received much coverage and attracted a wide range of views, some supportive of the changes and some totally opposed to it. The proposals have also caused widespread concern amongst buyers either currently in the process of buying a property and those planning on seeking mortgage approval in 2015 to buy a property. It should be noted that the proposals are simply that for now – proposals. All stakeholders have until December 8th to revert to the Central Bank with their views and representations. So, despite them being widely reported as new guidelines already brought in, we will have to wait a number of weeks to see what actually transpires. What is proposed? Before we look at the pros and cons of the proposed guidelines, let’s be crystal clear on the details of what is being proposed and how the banks can apply exceptions to the rules. - Rule 1 - The general maximum mortgage available to first time buyers would be 80% of the purchase price of the property meaning that buyers would need to have raised 20% of the purchase price themselves, generally in the form of savings - Exception 1 - The above guideline will not apply to every mortgage as banks will be permitted to lend up to 90% or 92% in 15% of cases (around 1 in 7 mortgages) - Rule 2 - In relation to income, the amount a bank can lend to a borrower will be limited to 3.5 times the borrower’s income - Exception 2 – Banks can lend more than 3.5 times income in 20% of cases (1 in five mortgages) - Rule 3 - The maximum mortgage available to an investor would be 70% of the purchase price of the property - Exception 3 – Banks can lend more than 70% in 10% of cases (1 in ten mortgages) Applying the new rules without exceptions, a buyer buying a property for €100,000 will need to have built up savings of €20,000 and will need to have an income of €23,000. However, a buyer buying a property for €300,000 will need to have savings of €60,000 and an income of €68,500. Figures like this are totally beyond the reach of the vast majority of first time buyers which may leave them unable to buy a property for a long time into the foreseeable future. Implications The reasons the Central Bank set out in their paper for bringing in these guidelines are that they feel that some lenders will not have learned their lessons of the outcome of reckless lending in the past and to reduce the risk of bank credit and housing price spirals from developing in the future. There are likely to be many unintended consequences of the proposals too o How will banks decide which borrowers will be able to borrow 90% or which borrowers can borrow more than the 3.5 times income level? Will this be given to the borrowers with the highest incomes? Borrowers in the safest categories of employment? Is there a danger they will be given to borrowers with personal connections to bank employees and executives o Does it really make sense to encourage banks to discriminate between first time buyers? Should it not be a level playing field for everyone? o The rental market is currently experiencing a surge in demand and a big shortage in supply. This is creating enormous problems for tenants who are struggling to afford their existing rent levels. If these tenants plan to purchase a family home, they are now going to have to save 20% of the purchase price of the property while continuing to pay rent, a rent which is likely to increase further if there are more tenants staying in rented accommodation o If there is a slowdown in the first time buyer demand, these individuals will cause an increase in demand for rental property which, in turn, will lead to an increase in rent levels o Overall, the new proposals are going to lock many first time buyers out of the property market leaving them unable to gain the famed ‘first rung of the ladder’ Other possible solutions So, if these rules are not the answer, what is? In my opinion, a much more joined up housing and finance strategy is required from government to incorporate: - A plan to increase the rate of new home building to meet demand and to incentivise building which would also help hugely to alleviate the unemployment rates - A cohesive solution to the social housing crisis being experienced - Monitoring of bank lending practises without adjusting lending limits to levels that exclude most first time buyers from the market - The freeing up of property currently caught up with NAMA and other banks to be either sold or rented in the market to ease the supply problem In relation to mortgages at levels of 85% and 90%, it was common place until the early 2000’s for banks to take out Mortgage Indemnity Insurance to insure themselves against potential falls in property prices and strong consideration should be given to bringing this system back in place. It must be pointed out that the new proposals represent a dramatic turnaround in the State’s attitude given that the Government only announced in May 2014 that they were proposing to underwrite the deposits for first time buyers to allow them to borrow up to 95% of the purchase price. Nothing came of this proposal but nonetheless, it is a total 180 degree reverse in opinion to now be limiting mortgages to 80% of value in the space of 5 months. I have no doubt that many submissions will be made to the Central Bank in the coming weeks in advance of the 8% December deadline and it will be most interesting to see how they respond to these and what final format the proposals will take. In the meantime, it is going to a busy property market for the rest of 2014.
Posted on: Mon, 13 Oct 2014 12:57:04 +0000
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