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Hope for home buyers as Central Bank set to relax mortgage lending rules

The lending rules have been blamed for excluding large numbers of potential buyers from the housing market.

Couple looks at houses for sale. Stock image

Governor of the Central Bank, Gabriel Makhlouf. Photo: Son Photographic Ltd

Charlie WestonIndependent.ie

Strict lending rules for those taking out a mortgage are to be eased.

The lending rules have been blamed for excluding large numbers of potential buyers from the housing market.

Central Bank Governor Gabriel Makhlouf is set to announce tomorrow the rule that people can only borrow three-and-a-half times their income is to be relaxed. It is expected to go to four times income.

This would allow people to borrow more, and would bring the lending limits more into line with other countries. It is known as the loan-to-income rule.

Such a move is a significant development as the Central Bank has been adamant that the rules have helped ensure home buyers have not overborrowed and meant that bank lending has been sensible.

Governor of the Central Bank, Gabriel Makhlouf. Photo: Son Photographic Ltd

It is understood there will be no changes to the part of the lending rules requiring first-time buyers to have a house deposit of 10pc, and 20pc for second-time buyers.

The easing of the loan-to-income rule comes at a time when mortgage interest rates are rising, which is already restricting what people can borrow.

Rising costs of living are also acting as a constraint on borrowing, as buyers have less income left after paying for essentials such as fuel and food to service a mortgage.

However, there are some fears that easing the loan-to-income rule will put further upward pressure on house prices, which are already at record levels.

The measures were introduced in 2015 to protect mortgage borrowers and the banks from another destructive, debt-driven financial shock.

The rules limit how much home buyers can borrow, based on their income and the value of the property.

First-time buyers are permitted to take loans up to 90pc of the value of their home, while subsequent buyers have their mortgages capped at 80pc. Buy-to-let (BTL) investors can borrow up to 70pc.

People buying a home are limited to borrowing three-and-a-half times their income.

But this does not apply to BTL buyers.

Banks can make a limited number of exceptions to these rules, but can’t exceed 10pc of borrowers.

The rules are among the tightest in the EU, where many countries have borrowing limits of four or five times earnings for home owners.

The changes comes after the Central Bank announced an extensive review of the entire mortgage limit framework last year to ensure they remain fit for purpose. Because home prices have risen much faster than incomes since the rules came into effect, the economic context has changed radically.

However, the Central Bank has been at pains in the past to stress that the lending limit have acted as a partial brake on run-away house price rises.

With limited new supply, thousands of buyers are being squeezed out of the market, ironically being forced to pay rents far higher than an equivalent mortgage.

The Central Bank conducted a public consultation on the rules last year with a survey as part of this process showing most people saying the rules were working as intended and that they should be a feature of the market going forward.

Only about one-in-10 renters who took part in the online survey said the limits were keeping them from taking out a mortgage.

Instead, most cited high house prices and the difficulties of raising a deposit as the main barriers to home ownership.

Cairn Homes CEO Michael Stanley, who runs Ireland’s largest house builder, said in in the past that the Government’s Housing For All plan was at risk because up to 500,000 middle-income earners were locked out of finance by the strict lending rules.


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