Central Bank of Ireland governor Gabriel Makhlouf has defended a decision to ease its mortgage lending rules, which would ordinarily push home prices higher, at a time when households are grappling with a cost-of-living crisis and interest rates are rising.
Speaking to reporters after the regulator decided to allow first-time buyers to borrow more based on their income and subsequent buyers to take on a loan with a lower deposit, Mr Makhlouf acknowledged that the relaxation would, “all else being equal”, lead to a “modest increase” in property prices.
However, the governor said that other factors, such as rising interest rates and rising cost of living, “absolutely will play a role in moderating house prices”.
Home prices in the State were rising at an annual rate of 12.2 per cent as of August as demand continued to outstrip supply, while general consumer price inflation was running at 8.2 per cent last month, driven by soaring fuel and food prices, according to the Central Statistics Office (CSO).
Mr Makhlouf said that the lending restrictions were “guardrails” against dangerous lending and borrowing, but that they do not replace the responsibility on both sides of a mortgage to properly assess whether the loan can be repaid.
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“The purchase of a house and taking out of a mortgage is normally the most significant financial decision anybody makes in their lifetime. When they make it, individuals, households – and lenders – need to think very, very carefully, not only whether they can afford to buy the house today but whether they are going to be able to afford to pay for a mortgage over the next 30 years,” he said.
“The Central Bank’s job is not to actually make that decision for individuals. Our job is to make sure that the rules are in place and act as guardrails, beyond which we believe risks are too great.”
Mr Makhlouf added: “If I thought it was the wrong time to [tweak the rules], then we wouldn’t have done it. These rules need to operate under whatever conditions apply to the economy.”
Under the changed rules, effective from January, first-time buyers will be able to take on mortgages of up to four times their income, compared to the current 3.5 times rate. The regulator will continue to enforce a limit on most loans to second and subsequent home buyers at 3.5 times income.
While the regulator had previously required most second and subsequent buyers to put down a 20 per cent deposit against a property to secure a loan, it has decided to lower this to 10 per cent, in line with its requirement for first-time buyers.
The Central Bank said that lenders will in future have allowances to permit 15 per cent of their lending above the limits for owner-occupiers, which marks as a simplification of the current exemptions that apply to different categories of borrowers. The loan-to-deposit ratio will remain at 70 per cent for up to 90 per cent of buy-to-let loans.
The outcome of the review of the rules, which began in May last year, comes at a time when some lenders are tightening their own mortgage lending criteria, amid rising interest rates and the cost-of-living crisis.
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While Mr Makhlouf said that the mortgage rules, introduced by the Central Bank in 2015 in the wake of Europe’s biggest housing crash, have strengthened the resilience of borrowers, lenders and the wider economy over the past seven years, he noted that this had come at a cost – felt most acutely by potential first-time buyers.
“Our listening and public engagement has made clear to us the ways in which these costs are felt in people’s lives, and has played a valuable role in helping us arrive at a targeted recalibration that balances the trade-off between allowing somewhat greater risk into the system, against an alleviation of some of the costs of the policy,” he said.
The Central Bank said its research suggests that the share of renters who can purchase a three-bed semidetached home in Dublin at the latest estimated build price has fallen since 2015. It estimates that increasing the mortgage cap for first-time buyers to four times income “will increase the share with estimated viable demand to around the level experienced in 2015″.
While builders had argued that relaxing the rules would make some residential projects more viable and boost supply in the market, Mark Cassidy, a senior economist with the regulator, said the impact of current rising construction costs and interest rates would offset this.
Joey Sheahan, head of credit at online broker MyMortgages, said the relaxation of the income rule for first-time buyers would allow a couple on a joint income of €80,000 to borrow €320,000, rather than the previous maximum of €280,000.
“This should make a considerable difference to so many trying to buy their first home,” he said. “Allowing second-time buyers to access a mortgage based on a 10 per cent deposit will come as a much-needed reprieve for the very many second-time buyers who simply cannot save the required 20 per cent.”
The Central Bank has also broadened its definition of a first-time buyer to include borrowers who are separated or divorced or have undergone insolvency or bankruptcy and no longer have an interest in their previous property.
