Buying a house? What do the new Central Bank mortgage regulations mean for you? How can you still get a mortgage? What can you do to help the process?
Now Updated post-Budget Help to Buy Scheme & proposed Central Bank deposit rule changes.
This guide has been authored by mortgage broker, Terry Palmer QFA, Director of Ocean.ie
To arrange a consultation by phone or in person, contact him using the enquiry form or call (01)8693400.
Mortgage Regulations Overview
Since the 1 January 2017, the deposit rules for first time buyers are amended. First time buyers will be required to have 10% of the purchase price regardless of the value of the property. The previous ceiling at €220,000 for 90% lending has been removed.
Previous rules (ended December 2016)
Purchase price: €300,000
Max mortgage amount: €262,000 (€220,000 @ 90% = €198,000 and the balance €80,000 @ 80% = € 64,000)
Deposit required: €38,000
Loan to value = 87%
Purchase price: €300,000
Mortgage amount: €270,000
Deposit required: €30,000
Loan to value = 90%
There is no change to the loan to income guidelines at 3.5 times salary/salaries but the banks will now be allowed to exceed these rules in 20% of their loan book.
There is also no change to second time buyers on LTV (loan to value) and LTI (loan to income). They are still required to have a 20% deposit and 3.5 times income guidelines remains. The only positive change here is that the banks exemptions to these rules has been increased from 15% to 20% of their loan book.
Regulations were first introduced in 2015
Following extensive consultation the Central Bank of Ireland’s new regulations on residential mortgage lending were finally announced in late January 2015 and made it difficult for those seeking a mortgage to obtain one.
The measures that the Central Bank introduced under Section 48 of the Central Bank (Supervision and Enforcement) Act 2013 are designed to work on two levels, one restricting loan to value so that a bigger deposit is sought and the second restricting the loan to income to 3.5 times gross income.
These rules apply to both first time buyers and non-first time buyers but in differing ways. They had a number of options open to them to reduce potential vulnerabilities in the property market as outlined in a framework paper they produced Central Bank of Ireland (2014), A macro-prudential policy framework for Ireland.
Notwithstanding other discussion papers they also circulated (e.g. Central Bank of Ireland (2014), Macro-prudential policy for residential mortgage lending, Consultation Paper CP87) they chose to restrict lending by LTV (Loan to Value) and LTI (loan to Income).
The Central Bank intends to impose this requirement pursuant to Section 22 of the Central Bank (Supervision and Enforcement) Act 2013.
Under this requirement the lenders will submit details on their residential mortgage lending on two dates throughout the year;
(i) 30th June to reflect activity in the first 6 month period and
(ii) annually on the 31st December to reflect the full year’s activity.
Loan to Value restrictions
- For First Time Buyers they can borrow 90% on properties valued at €220,000 on less and 80% on any excess value over this amount.
So let’s say the purchase price is €300,000. Under the old criteria they could have borrowed 90% or €270,000 (in some cases 92% was available but this is completely gone now) but now they can borrow a maximum of €262,000 (the first €220,000 @90% = €198,000 and the next €80,000 @80% = € 64,000). The deposit required has thus increased from €30,000 to €38,000.
- For non-first time buyers they are subject to a limit of 80% loan to value on the total purchase price. There are no tiered amounts for them.
Note that the banks do have some flexibility here where they can exceed these limits in no more than 15% of their PDH (Private Dwelling Homes) loans.
- For buy-to-let mortgages they are subject to a limit of 70% loan to value. The banks in this case do have the flexibility to exceed this limit on no more than 10% of the value of their entire buy to let mortgage lending.
Loan to income restrictions
Loans for the purchase of private dwelling homes are subject to a limit of 3.5 times loan to gross income.
So for example a married couple in their thirties with no dependents both with salaries of €40,000 per annum who could previously borrow in excess of €400,000 are now restricted to €280,000 (€80,000 X 3.5). The same rules are applicable for both first time buyers and non-first time buyers
Note: There are exceptions here also with the banks being able to exceed these limits in no more than 20% of the euro value of all PDH loan on an annual basis.
These regulations apply to a housing loan that is secured on a residential property;
(i) that is entered into by a lender
(ii) where the borrower has not already received an AIP (approval in principle) based on a full credit assessment supported by the necessary financial information
(iii) where the housing loan is secured on a residential property in the state.
Exceptions to the regulations
The following borrowers are exempts from the new restrictions:
(i) Negative equity borrowers: Borrowers in negative equity on a current property who are seeking a housing loan to finance a new property are out of scope of the LTV limits.
(ii) Switcher mortgages: remortgages on the same residential property with an amount that is the outstanding monetary balance at the date of the switch and not at origination (allowing for reasonable fees and costs associated with switching) are exempt from the LTV limits.
(iii) Mortgages in arrears: Alternative Repayments Arrangement or other options agreed with a borrower, the purpose of which is to resolve a borrower’s pre-arrears or arrears situation, are exempt from the limits.
Help to Buy Scheme – First time Buyers’ Tax Rebate
The help to buy scheme launched in Budget 2017 by Minister Michael Noonan is available for first time buyers who have signed a contract to purchase a new property after the 19 July 2016.
What is the purpose of the Help to Buy Scheme?
The idea is to try and stimulate building of new residential properties in order to satisfy the shortfall in the housing stock.
How it works
A tax rebate is available equal to 5% of the value of the house. This rebate is limited to total income tax paid over the previous 4 years and is capped at € 20,000.
The 5% will only apply to houses priced up to €400,000 but buyers of houses up the €500,000 will still be eligible for the rebate but not at 5% as it is capped at €20,000.
Applicants must be borrowing more than 70% of the purchase price. This was reduced in the Finance Act from the initial 80% mentioned in the budget speech due to Central Bank pressures.
|Purchase Price||Tax Rebate|
Who is a first time buyer?
The Revenue class a first time buyer as someone who
‘must not have either individually or jointly with any other person (directly or indirectly), previously purchased, built or inherited a property’.
If the application is a joint application and one applicant has previously bought a property, both applicants would be classed as first time buyers and would not qualify for this scheme.
What is a new property?
A new property is classed as one that has previously not been occupied.
Does this apply to self-builds?
Yes, it does apply. Applicants must take out a mortgage of more than 80% of the valuation provided to the bank and it is available from when they draw down the first stage payment.
Is there a clawback?
The property must be owned and occupied by at least one of the first time buyers for 5 years after the date of purchase otherwise all or part of the tax rebate must be repaid to the Revenue Commissioners as per the table below.
If you leave or sell your property within the following periods of time a percentage of the tax rebate will have to be returned.
|Clawback Periods||Rebate to be Repaid|
|within 1 year
within 2 years
within 3 years
within 4 years
within 5 years
Note: The above rules are currently as presented in the Budget and may change further as Finance Bill passes through the Dáil over the coming months. The Scheme is not due to start until January 2017 but will be backdated on properties where contracts were signed after the 19th July 2016.
How and when is the rebate paid?
The exact workings of the scheme are yet to be announced but it is envisaged that if you close on the new property before 31 December in a given year you will make a tax return directly with the Revenue Commissioners in the new year and claim back the rebate from them. After the 1 January in the subsequent year, it is expected that the tax rebate will be paid directly to the builder/developer therefore reducing the deposit that you will require for the purchase of the property.
TEN STEP GUIDE TO GETTING A MORTGAGE
If you are looking for a mortgage these are 10 simple steps that will help to make the process easier for you.
1. Plan ahead
The banks take a six month snapshot of your financial affairs so it is important that you have everything in order in this period. Make sure that salaries are mandated in to current accounts and rental payments are evident if applicable. If you paying rent by cash change it to a monthly standing order from your account. Set up a separate savings account and have a regular amount transferred.
2. Know what you can borrow
Talk to your lender or preferably an independent adviser and get an indication of what you could borrow. Banks tend to differ with criteria and some are better than others with certain incomes, occupations, contracts and even the term offered.
Be realistic in your expectations, if your income is not guaranteed the banks will not take 100% of it. If you are self-employed an average of the last 2/3 years proven income will be taken. Also know that the bigger deposit that you can scrape together the better the interest rates available. It could the case of staying below a certain price in order to fall into a lower interest band will mean in the long term the savings will be substantial
3. Run a credit check on yourself!
Most of the lenders in Ireland send details about their borrowers and their repayment records to a central agency called the Irish Credit Bureau. Under the Data Protection Acts 1988 and 2003, you are entitled to receive a full copy of any data held on you on the Irish Credit Bureau’s ICB database. This can be done by logging on to www.icb.ie for a €6.00 fee per application.
The information held by the Irish Credit Bureau on you includes;
- name, address and date of birth supplied to the credit provider
- the names of lenders and any accounts you hold or have held with them within the last 5 years
- details of whether payment was made every month and any arrears
- anylegal actions taken by the lender
- anysettlements made for less than was owed.
If you feel there is incorrect detail showing on the ICB this can be corrected before the mortgage application is submitted and should lessen any possible delays. If there was a legacy issue it may be better to wait until it has been removed from the ICB altogether (such data can be held for a maximum of seven years from when first reported).
4. Demonstrate affordability
One of the main changes to lending over the last few years has been the introduction of affordability and proven affordability into the credit process.
Although it sounds fairly obvious, in the past the banks were basing affordability on incomes alone and they didn’t take into account what you did with that income. Nowadays they want to see salaries mandated into bank accounts and then evidence that you can afford the new mortgage in the accounts.
So for example, if the new mortgage repayment will be €1,000 a month, can you show evidence that you can afford to pay this amount at a stress-tested interest rate? This can be shown by rent payments, savings, loans etc being cleared with reasonable comfort.
5. Maintain good bank accounts
The banks will have a forensic look at the last six months of your current accounts so it is important that you have no extravagant spending or online gambling evident. Make sure you have no missed payments on loans or referral fees during this period. If there are any large lodgements or withdrawals the lender will look for an explanation so have something prepared. If you have an overdraft limit try not to use it in this six month period.
6. Clear credit card balances every month
If possible, restrict your use of the credit card altogether but if not possible try to clear the balance in full every month. An outstanding credit card balance will be treated like a short term loan and will restrict the amount you can borrow.
7. Stability of employment
- Employees:If you are thinking of changing employments hold off as you will need to be in full time permanent employment free of any probationary period. Is your employment perceived to be secure? Has there been any talk of job losses in the press? If so, can you show how you will not be affected? These are all questions that you need to ask yourself because that is what the banks will do.
- Self-employed:You will need at least two full years’ accounts for the business. A little synopsis of your business will help the underwriter (contracts obtained, growth of business etc.) especially if you are in a speciality field. You will also be required to have the previous 2/3 years income confirmed by the Revenue Commissioners and confirmation that your tax affairs are in order confirmed by your accountant.
8. Get your paperwork in order
Know what the banks are looking for and submit everything upfront. Missing paperwork will only delay the process as the lender will not make a decision unless they have all the information that they need. This is especially true for the self-employed (see point 7 above). If there is an issue with the credit check have an explanation upfront with supporting paper work preferably (see point 3 above).
9. Budget for extras
On top of your monthly mortgage repayment you will also have other monthly costs like mortgage protection and house insurance.
Remember if you are getting a mortgage directly from a bank you do not have to go with their choice for your insurance. The bank is more than likely a tied agent of one Life Company and can only therefore offer their products. Shop around the market or visit a Financial Broker for the best deals around.
You will also have other initial one off upfront costs; they will include such items as valuation fee (approx €130) and structural surveys (costs will depend on property type and age)
There are also of course solicitors’ conveyancing fees. These costs depend on the solicitor you choose, the type of sale e.g. whether is it a probate sale and/or also the title status (i.e. whether it is a Land Registry or Registry of Deeds conveyance). The Lawyer.ie guide to conveyancing is here if you need more information or are looking for a quote.
10. Shop around for the best mortgage deal
Seek independent advice. Remember the bank will only advise you on the products they have to offer whereas a financial broker can offer you greater options – this also includes mortgage protection insurance which is a legal requirement in most cases >> read more about mortgage protection here
Image Credit: Central Bank of Ireland
My firm Ocean.ie provide a mortgage consultancy and brokerage service. You can contact me at 01-8693400 or just send me a quick enquiry below.