Give Me a Crash Course In . . . revised mortgage rules

The Central Bank was in the news again this week, wasn’t it?

It certainly was. On Thursday it was accused by the Oireachtas Finance Committee of throwing consumers to the wolves by not doing enough to stop motor insurance companies gouging us.

Sorry, what? Car insurance? I was talking about mortgages?

Oh yes, that’s right. It made headlines when it comes to mortgages too after it announced significant changes to rules which banks must adhere to when it comes to lending money to people in the market for a new house.

But I thought its rules on mortgages were brand spanking new?

Ah they are. Sort of. The Central Bank unveiled shiny new rules limiting the amounts banks could lend to would-be homebuyers under two years ago but, having had time to reflect on the impact of these rules, it has decided to have another go at it.

Why's that?

It was under pressure from all quarters. The Government, the building industry, people renting and people trying to buy were unhappy with some of the rules on deposits.

So the bank caved in to vested interests?

That might be a harsh way of putting it. It didn’t cave in at all; it just modified some of the rules to make it easier for some people to buy.

Which people?

First-time buyers. From January, the ceiling on the loan-to-value (LTV) ratio for all first-time buyers will be set at 90 per cent. As it stands today, the ceiling for first-time buyers is 90 per cent for loans up to €220,000 and 80 per cent for the balance. That means if a first-time buyer buys a house worth €400,000 today they need a 10 per cent deposit on the first €220,000 (€22,000) and a 20 per cent deposit on the remaining €180,000 (€36,000). So, a €400,000 house needs a total of €58,000.

And what happens on January 1st?

The very same buyer will need a deposit of 10 per cent in total which is €40,000, or €18,000 less than at present.

That’s lovely for first-timers isn’t it.

It absolutely is. But it’s not the only good news they have had in recent times. In the Budget Michael Noonan also rolled out a help-to-buy scheme. Under it, first-time buyers get a tax rebate of up to €20,000 on new homes valued up to €400,000. That means that a first-time buyer needs to save only €20,000 to buy a new house.

And what about second- or third-time buyers? What do they get?

Oh, nothing.

What?

That’s right, nothing. The Government and the Central Bank seem to love first-time buyers more than second-time or later ones.

But the changes are good, right?

Possibly. If first-time buyers can get access to homes faster it will mean those trading up will be able to sell faster and might ease the pressure on the rental market. On the other hand, relaxing the rules could mean house prices rise further and faster.

Anything else?

Well, banks have been given greater flexibility to break the rules. Under the new rules, 5 per cent of the value of new lending to first-time buyers will be allowed above the 90 per cent LTV limit, while 20 per cent of the value of new lending to second timers will be allowed to top the 80 per cent LTV limit. This replaces the current requirement allowing 15 per cent of total lending to all borrowers, to top the LTV limits.

And what does that mean?

High earners are likely to benefit from the slight relaxation.

That’s nice for them, isn’t it?

Yes it is.