The Central Bank of Ireland determines the lending rules that lenders and buyers must follow for mortgage loan transactions.
The purpose of these mortgage lending measures is to ensure financial stability and strengthen the long-term resilience of the Irish financial system. These measures also function to regulate lenders, thereby ensuring that these financial institutions lend out money in a sensible manner. Additionally, these rules protect the Irish financial system from a surplus of credit by limiting borrowers to loans that they can actually afford.
These mortgage measures are reviewed annually by the Central Bank of Ireland, at which point they can be adjusted and changed.
Central Bank of Ireland Mortgage Rules
The lending rules set by the Central Bank can be broken down into two categories: Loan-to-Value Limits and Loan-to-Income Limits.
In the Loan-to-Value Limits, the amount of the deposit is determined by the category of buyer that the borrower fits under. First-time buyers can borrow up to 90% of the cost of the property, second and subsequent buyers can borrow up to 80%, and buy-to-let buyers can borrow up to 70%.
The Loan-to-Income Limit determines the total amount of money that can be borrowed, and it is based on the income of the borrower(s). This measure states that you can borrow up to 3.5 times your annual gross income.
Calls for Change in Central Bank Rules
According to Independent.ie, there have been increasing concerns in Ireland over the mortgage measures that have been set by the Central Bank. In a letter sent to Central Bank Governor Gabriel Makhlouf, Institute of Professional Auctioneers and Valuers (IPAV) chief executive Pat Davitt explained that these growing concerns are due to individuals who have average incomes being essentially “locked out” of the housing market.
This is particularly due to the Loan-to-Income limit that restricts people from borrowing more than 3.5 times their annual gross income. Davitt explains that borrowers with an annual income of €50,000 or less will find an increasingly limited amount of housing options.
Adjusting the Central Bank’s mortgage rules would allow for greater access to the housing market. This greater access would also free-up rental properties leading rental prices to decrease, thereby reducing the need for government housing assistance payments.
The IPAV is lobbying for an increase of the Loan-to-Income limit from 3.5 to 4.5 times gross annual income. This increase would allow individuals with average incomes to access the housing market, because there would be a greater number of housing options available to them.