The Central Bank’s decision to relax strict rules on mortgage loans was made in a context of rising interest rates and tight supply.
Pressured home buyers will get some relief as central bank governor gabriel makhlouf it is set to relax the rule that people can only borrow three and a half times their income.
The rule amendment will allow buyers to borrow four times their income in a big boost for first-time buyers in particular.
A single buyer with an income of €50,000 can only borrow €175,000. The new rule will allow them to borrow €200,000.
The easing of the loan-to-income rule will increase fears of further upward pressure on house prices, which are already at record levels. Some will see it as increased demand when supply is so tight.
However, the easing of the loan-to-income rule comes at a time when mortgage interest rates are rising, which is already restricting what people can borrow.
Central bank officials believe the current option is prudent given the general rise in mortgage costs, in addition to continued supply constraints.
Some lenders have increased their interest rates by two percentage points, and AIB Group raised all of its fixed rates last week by 0.5 percentage point.
Higher living costs are also acting as a constraint on lending, as buyers have less income after paying for essentials like fuel and food.
Mortgage broker Michael Dowling said the rule change is welcome.
The rules are among the strictest in the EU, where many countries have borrowing limits of four or five times earnings.
“It will make a difference, particularly for first-time buyers at a time when mortgage rates are rising,” he said.
Dowling added that borrowers will still be stress-tested to make sure they can afford the mortgage.
Most other countries that have mortgage loan limits allow people to borrow four times their income.
The chronic lack of housing is considered the biggest problem for the real estate market here.
Relaxing the income rule is a significant step forward, as the Central Bank had stood firm on rules to ensure home buyers don’t go into excessive debt.
It is understood that there will be no change to the part of the lending rules that requires first time buyers to have a 10% deposit and 20% for second time buyers.
The mortgage measures, known as macroprudential rules, were introduced in 2015 to protect mortgage borrowers and banks from another destructive debt-driven financial shock.
The rules limit how much homebuyers can borrow, based on their income and property value.
First-time buyers can borrow up to 90 percent of their home’s value, while subsequent buyers are capped at 80 percent mortgages. Buy-to-let (BTL) investors can borrow up to 70 percent.
People buying a home had been limited to borrowing three and a half times their income, but that didn’t apply to BTL buyers.
Banks can make a limited number of exceptions to the rules, but the number of exceptions cannot exceed 10% of borrowers.
The rules are among the strictest in the EU, where many countries have borrowing limits of four or five times earnings.
The change comes after the Central Bank announced a comprehensive review of the entire mortgage limit framework last year to ensure they remain fit for purpose. With home prices rising much faster than incomes since the rules went into effect, the economic landscape has changed radically.
However, the central bank has been at pains in the past to emphasize that lending limits have acted as a partial brake on runaway house price increases.
