Relaxation of the Central Bank’s Mortgage Lending Rules

The Central Bank of Ireland (the “CBI”) announced a relaxation of its existing mortgage lending rules on 18 October 2022 to allow prospective homeowners borrow up to four times their income as a result of growing affordability challenges in the market since they were first introduced in 2015.

The new rules, which will take effect from January 1, 2023, are being introduced following the culmination of a comprehensive review carried out by the CBI on its macroprudential rules which were first launched last year.

Gabriel Makhlouf, the Governor of the CBI, confirmed that trends in the housing market had resulted in “growing affordability pressures” with house prices and rents rising faster than incomes in the intervening seven years not to mention significant changes in the overall economic climate.

The rational for the introduction of the existing mortgage lending rules was to prevent a repeat of the credit-fuelled property bubble that led to the financial crash in Ireland and to limit the amount people could borrow to ensure they could service their mortgage and make their monthly repayments.

Existing Rules at a Glance: (effective until 31 December 2022):

The existing rules set limits on the amount of money that can be borrowed to buy residential property as follows:

• Loan-to-Income (LTI) Limit – a borrower is limited to borrowing up to 3.5 times their salary (i.e. a borrower with a salary of €50,000 per annum can borrow up to €175,000). Banks can currently however, make a limited number of exceptions but this can’t exceed 10% of their borrower base in any given year.
• Loan-to-Value (LTV) Limit – a borrower is limited to borrowing up to 90% of the value of property they are borrowing to purchase and require cash reserves for the 10% deposit (i.e. if the target property is worth €400,000, the maximum the borrower can borrow is €360,000 and they must have €40,000 in cash reserves for the 10% deposit).
• Second-time and subsequent buyers are required to provide a minimum deposit of 20% (i.e. if they are buying a property for €400,000 they require a minimum deposit of €80,000 and can borrow up to the balance of €320,000).
• Purchasers of buy-to-let properties require a minimum deposit of 30% (i.e. if they are buying a property for €400,000 they require a minimum deposit of €120,000 and can borrow up to the balance of €280,000).

New Rules at a Glance: (effective from 1 January 2023):

• Loan-to-Income (“LTI”) limit– a borrower is limited to borrowing up to 4 times their salary (i.e. a borrower with a salary of €50,000 per annum can borrow up to €200,000). Banks can currently however, make a limited number of exceptions but this can’t exceed 10% of their borrower base in any given year.
  Loan-to-Value (“LTV”) limit – a borrower is still limited to borrowing up to 90% of the value of property they are borrowing to purchase and requires cash reserves for the 10% deposit (i.e. if the target property is worth €400,000, the maximum the borrower can borrow is €360,000 and they must have €40,000 in cash reserves for the 10% deposit).
• Under the new rules, second-time and subsequent buyers will now also be required to provide a minimum deposit of 10% (reduction of 10% from the existing rules).
• Purchasers of buy-to-let properties will still require a minimum deposit of 30% (i.e. if they are buying a property for €400,000 they require a minimum deposit of €120,000 and can borrow up to the balance of €280,000) under the new rules.
• The CBI have also confirmed that borrowers who are divorced or separated or have undergone bankruptcy or insolvency may be considered first time buyers under the new rules where they no longer have an interest in the previous property in what has been termed a “fresh start” perspective and which will be a welcomed measure to many. It has also been suggested that first time buyers who get a top-up loan or re-mortgage with an increase in the principal may be considered “first time” as well, provided the property remains their primary residence.

The changes in the LTI limits will bring Ireland’s mortgage lending regulations into line with or closer to many European countries, including the UK where buyers can borrow up to 4.5 times their income.

The new rules will be welcomed by many home buyers however, allowing people to borrow more will almost certainly lead to a rise in housing prices amid tight supply and strong demand and the under supply of available housing stock will be a significant underlying issue facing the economy for the foreseeable future. The CBI have also pointed out that the new rules have been adopted to ensure financial stability within the economy and have not been created to control house prices and it remains to be seen what precise impact the new rules will have on the residential property market.