Mortgage exemptions could dry up as soon as April

First-time buyers and trader uppers looking to borrow more than Central Bank rules allow are already running out of time to secure an exemption for a home purchase this year, with banks expected to have allocated all their allowances as early as April. This could leave many putative home owners struggling to borrow the sums needed to purchase a home at a time of rapidly rising house prices.

Mortgage broker Michael Dowling of Dowling Financial says he expects that exemptions will run out by April, driven by so many approvals not yet drawn down from last year.

“Banks will run short of exceptions at a much earlier stage than previous years,” he says. “It’s principally driven by cases that didn’t close in 2017, but that were already approved [for the exemption]”.

With these cases now closing, banks are running short of the number of mortgages they can lend at multiples greater than 3.5 times income, or for deposits of less than 20 per cent for trader uppers or downers, or less than 10 per cent for first-time buyers (FTBs).

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“It’s a very difficult exercise to control, as you can’t determine when a house sale will complete,” says Dowling.

Difficulty

Last year, Permanent TSB was one of the few lenders that didn't close to exemptions, with most of the banks running out around August/September, which meant getting an exception on the income multiple became a "real difficulty" late in the year, says Dowling.

Getting an allowance or exemption means you can borrow substantially more: FTBs on a similar income with an exemption were borrowing €73,330 more, according to Central Bank figures, than someone without a loan-to-income allowance. This is because an exemption means that a borrower may need a deposit of as little as 5 per cent (typically 20 per cent for second and subsequent buyers (SSBs), or 10 per cent for FTBs, while they will be able to borrow about 4.5 times of their income – as against 3.5 times normally.

However, banks are restricted in the exemptions they can grant as follows: 5 per cent of value of mortgages to FTBs; 20 per cent to SSBs; and 10 per cent to buy-to-let buyers. Exemptions also apply when it comes to income multiples, with 20 per cent of FTBs allowed to borrow more than 3.5 times their income, and 10 per cent of SSBs.

Figures from the Central Bank show that in the first half of last year, some 1,336 FTBs were able to borrow more than 3.5 times their combined income, as against 506 SSBs. On the other hand, just 30 FTBs managed to buy with a deposit of less than 10 per cent, while 884 SSBs bought with a deposit of less than 20 per cent.

Rachel McGovern, director of financial services with Brokers Ireland, argues that the current system should be overhauled.

“It’s very hard for lender to plan,” she says, adding that there should be some mechanism for the lender to exceed the agreed limits in one year and cut back the next.

“They [the Central Bank] haven’t really thought through this process,” she says, adding that it is “very unfair” for home buyers, as if they go to the bank in January they might get an exemption, but if they leave it until September they may not.