The confusion, speculation and frantic lobbying by vested interests is finally over is relation to the Central Banks efforts to show that we are now going to be a governed by highly paid civil servants and not by elected politicians. The Central Bank has announced its new mortgage lending rules. The rules will have an immediate effect on restricting mortgage lending right across the economy with those looking to live in urban areas being most significantly affected. We now take a closer look at the effects of the new mortgage lending rules.
What’s effect are the new mortgage lending rules going to have on first-time buyers (FTB’s)
For first-time buyers (FTB) if they are purchasing a property for less than €220,000 and the amount being borrowed is less that €220,000 with the amount borrowed not being greater than 3.5 times their income they can continue as they were. Unfortunately, for a significant majority of individuals that propertylawsolicitor.ie represents in the purchasing process this is going to apply to the minority of home buyers in the greater Dublin and surrounding urban centres.
Will the rules push house prices down?
While the Central Bank has asserted that its rules are not aimed specifically at calming house price growth, for many this is an expected impact of the rules, however that has not been the experience in Norway. In March 2010 the Norwegian regulator introduced loan-to-value (LTV) limits of 90 per cent to calm what many perceived to be a housing bubble. Eighteen months later, it pushed it back to 85 per cent, as well as introducing a stress test of five percentage point increases from the current level. But what impact did it have on house prices? Since 2010 there has been a steady growth of between 5 and 10 per cent per annum.
The obvious impact is the less you borrow the less you repay in interest
Irrespective of what impact the changes have on property prices, the simple fact is that the more equity you put into your property upfront, the lower the overall cost of the purchase price will be. This is because you will have to repay less money in interest, which will bring down the overall cost of borrowing. This an obvious statement and of little solace to those left in the position of not being not able to proceed with the purchase of their home as a result of these new rules.
Consider the example of a couple trading up to a house valued at €450,000 in Dublin. Under the new rules, they will require a deposit of €90,000 to complete that purchase. This means that on a mortgage of €360,000 over 30 years at 4 per cent, the total cost of borrowing will be €258,000. Add this to the purchase price and the total cost of the property is around €708,000.Now consider someone buying with a 10 per cent deposit. In this scenario, the cost of borrowing will be €291,000, a hefty €33,000 more, pushing the total purchase price up to €741,000.
Will the banks be able to get around rules? Maybe but at whose expense
Maybe, but the question is at this stage at whose expense and at what cost to society as a whole? First-time buyers and those trading up will only be able to borrow up to 3.5 times their salary, and the latter category will also need a deposit of 20 per cent to get a mortgage. However, it’s important to remember that these limits are not absolute. Banks will have discretion to ignore these limits in 15 per cent of LTV cases, and 20 per cent of cases when it comes to the income multiple.
This means, for example, that one in every five mortgages approved by a bank may be offered on an income multiple of between 3.5 and five times, while one in every six-seven trader-up mortgages can be approved at an LTV of more than 80 per cent.
How the system will work remains unclear. It’s expected that banks will have to account for these exceptions on a quarterly basis to the central bank. Once they have used up these they could pull down the shutters or hold over applications to bring them within their exceptions for the next quarter and thus avoid the application of the new rules. If there is a means of avoiding rules then we know that the banks are more than capable of exercising such discretion regardless. In real terms this means that those individuals working outside of the so called professions may well end up bearing the brunt of these mortgage lending restrictions.
Who will the new rules worst effect
While it’s possible to find positives for first-time buyers in the new mortgage regime, it’s difficult to put a positive spin on the situation many would-be trader-uppers are likely to find themselves in.
If you’re in negative equity and looking to trade up, you will be exempted from the rules but evidence would suggest that the much talked-about negative equity mortgage is actually in scarce supply. And if you’re just about at break-even point in your first property, with very little equity, trading up has become a lot more difficult.
Take the example of a couple who bought a two-bedroom apartment in Dublin at the height of the boom for €450,000 on a 90 per cent mortgage. Now with two children running around, the family has outgrown their space, and are renting out this apartment, and renting a house for themselves. Luckily, thanks to a low-cost tracker mortgage, they have managed to make the sums stack up on this. However, they would really like to buy a home for their family, and having diligently paid down their mortgage since 2006, they are finally in a position to sell as they are close to break-even in terms of the amount outstanding on the loan/sale price.
But the new rules are going to make this move a lot more difficult for them. While they have built up a nest-egg of €40,000 their desired home is closer to €400,000. Under the new rules, this will mean a deposit of €80,000. If, as has been suggested, the new rules slow house price growth and even depress prices to some extent, the couple won’t need to save as much to purchase. However, they will then be stuck on the other end of the property chain, as their apartment may fall back again into negative equity – and, as mentioned, such mortgages can be difficult to get. Moreover, the LTI of 3.5 per cent applies even to negative equity mortgages- and as the loan will be larger due to carrying the element of negative equity - the couple may not qualify for this either.
Where is this going to end up
As solicitors providing conveyancing services for many years we have seen the application of light touch regulation. We have seen cases of individuals being advised to go to particular mortgage brokers because they will get you anything you are looking for and being able to play up various aspects of individuals earning capacity in efforts of getting mortgage approval for what ended up being nothing more than speculation on the property market. The result was very much to be seen over the past number of years and the trail of destruction has been for many catastrophic in personal terms of losses suffered. Going forward regulation has to be welcome, but it remains to be seen if these new lending rules will have the desired effect. Unfortunately the initial results must mean that there is going to be an inequality in those who can and cannot obtain a mortgage. What can be done to rectify this outcome remains to be seen.