Key Post Summary of the proposed Central Bank Mortgage Restrictions

The Central Bank issued their Consultation paper on mortgage restrictions yesterday. It's called the Macro-prudential policy for residential mortgage lending and it sets out their proposals for residential mortgage lending in Ireland.

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Background

1. 29% of loans issued in 2006 had a loan to value (LTV) of over 90%.
2. During the boom, almost 2/3 of mortgages were for over 3.5 times salary and 1/3 were for over 4.5 times salary.
3. The Central Bank recognise that property markets are cyclical. Their aim is to reduce the probability and depth of another property bubble.
4. As we are part of the EMU, the Central Bank are very limited in measures they can take to prevent another property bubble i.e. they can't increase interest rates.
5. While they recognise that the banks aren't the cause of the significant property price increases in Dublin, the Central Bank want to make sure the banks not lose the run of themselves again. The banks can't be trusted to act sensibly, so lending restrictions have to be imposed.

Loan to Value (LTV) Cap

1. The maximum you can borrow will be 80% of the value of the house.
2. That means you will need a deposit of 20%.
3. There is an allowance where 15% of the banks lending over a 6 month period can be above the 80% LTV limit.
4. Any equity release or mortgage top-up that would bring the LTV above the cap, would be in the scope of the measure.
5. Exemptions:

Multiple of salary

1. Borrowers can get a mortgage for up to 3.5 times of their gross annual income.
2. There is an allowance where 20% of the banks lending over a 6 month period can be above the 3.5 times limit.
3. Any equity release or mortgage top-up that would bring the LTV above the cap, would be in the scope of the measure.
4. Exemptions:

• 
  
  [*]Buy to Lets
  [*]Switcher mortgages with no increase in principle
  [*]Mortgages in arrears
  ​

First Time Buyers

When this news was released yesterday, there was a lot of panic, especially from those trying to save for their first home. Property prices in Dublin are rising faster than people can save, so this seemed to be another blow for First Time Buyers.

However, lenders do have scope for 15% of their loan book in a 6 month period to have a LTV of over 80%. They can also give loans over 3.5 salary for 20% of their loan book in a 6 month period, so there is scope to still get a mortgage with a smaller deposit.

The banks lending criteria will still apply so make sure you meet all their criteria before applying for a loan.

Buy to Let (BTL)

1. The maximum you can borrow will be 70% of the value of the property.
2. There is an allowance where 10% of the lending over a 6 month period can be above the 70% LTV limit.
3. As there will be rental income for BTL's, the multiple of salary restriction does not apply. If the borrower gets into financial difficulty, they can sell the property. With the 70% loan to value, the lenders exposure of not getting their money back is reduced.

Negative Equity Mortgages

1. There was 268,000 negative equity mortgages at the end of 2013.
2. The LTV restrictions have been exempted for negative equity mortgages.
3. The 80% LTV limit will still apply to the new property, before the residual debt it applied.

What next?

1. These are only proposals at this stage and they are open to consultation up to 8 December 2014.
2. If they are introduced, there will not be a long lead in period. It is expected they will be introduced in January 2015.
3. The Central Bank will not allowed attempts to circumvent the regulations such as offering secondary mortgages to part finance the deposit.
4. If you have a mortgage offer or committed but undrawn amounts, these new restrictions will not apply.

Steven
www.bluewaterfp.ie

How long does a mortgage offer stand before it needs to be drawn down?

I will be making a submission. I welcome the central bank's attempts to control lending as it did go crazy before. We visited a few banks this year and had the sense they were nearly throwing money at us again. The measures need to find a balance between imposing overly stringent measures and controlling lending. I dont think this is it.

The wording of the proposed regulations

The actual proposed regulations are quite short

5. These Regulations shall not apply to:
i. a housing loan which replaces another housing loan, and under which the amount advanced under the replacement housing loan does not exceed the monetary amount outstanding to the lender, or to a different lender under a previous housing loan.

In determining the amount of the housing loan provided, no account shall be taken of:
(a) arrangement fees;
(b) professional fees and costs; or
(c) administration costs.

ii. a housing loan entered into between a borrower and a lender the purpose of which is to address the arrears or pre arrears of the borrower on an existing housing loan by agreeing alternative repayment arrangements; and

iii. without prejudice to the generality of (ii), any financial arrangement which is entered into as part of the Mortgage Arrears Resolution Process described in Section 16 of the Code of Conduct on Mortgage Arrears issued by the Bank.


6. Loan to Income
(1) A lender shall ensure that the total aggregate value of High Loan to Income Housing Loans it enters into in a half year period does not exceed 20 per cent of all housing loans for principal dwelling homes it enters into in that half year period.

(2) Paragraph (1) shall only apply to housing loans for principal dwelling home purpose.

‘High Loan to Income Housing Loan’ means a housing loan or the total sum of housing loans provided by a lender in respect of an individual residential property under which the total amount advanced meets or exceeds a multiple of 3.5 times the borrower’s income at the time at which that income is assessed by the lender for the purpose of entering into the housing loan.

7. Housing Loan to Value

(1) In this regulation, the housing loan to value ratio shall be calculated in accordance with Schedule 1.

(2) A lender shall ensure that the total aggregate value of housing loans for principal dwelling home purposes with a loan to value ratio in excess of 80 per cent it enters into in a half year period does not exceed 15 per cent of all housing loans for principal dwelling home purposes it enters into in that half year period.

(3) A lender shall ensure that the total aggregate value of housing loans other than such amounts advanced for principal dwelling home purposes with a housing loan to value ratio in excess of 70 per cent it enters into in a half year period does not exceed 10 per cent of all such housing loans.

8. Valuation of Residential Property
The lender shall ensure that the process to determine the market value of the residential property shall be conducted as follows:
(a) the lender shall appoint an appraiser to calculate the market value and the such appraiser shall:
(i) be professionally competent and sufficiently independent from the housing loan underwriting process so that he can provide an impartial and objective valuation;
(ii) assess the market value of the residential property, and document that assessment in a clear and transparent manner;
(iii) record the methodology for the calculation of the market value in a durable medium;
(iv) provide a copy of the information referred to in (iii) to the lender.

(b) The lender shall maintain a copy of the information referred in subparagraph (a)(iii) in a durable medium.

Hi Stephen

Great summary. Thanks very much. The consultation document is long and hard to read.

Brendan

Can someone please tell me why LTV should be used, rather than LTPP (Loan to purchase price)?
After all, I understand that LTPP is good enough for the Revenue in calculating stamp duty. (Or am I wrong?)

We should have known better!
I have just heard that house-price inflation is now exceeding the rate of increase at the height of the boom. On this same day we hear that the Central Bank is postponing the introduction of the announced credit controls to some unspecified date down the road.
We now have a full-scale property-buying panic, without any end in sight. Perfect for the banks whose collateral is now being artificially inflated at Celtic Tiger rates. Disastrous for home-buyers and the real economy.
It is hard now to believe that this was anything more than the CB doing yet another favour for its banker clients.
Is Honohan the worst ever Governor of the CB?

My feeling from what Honohan said was that the delay from the initial 1st January date wasn't going to be long, and that it would come in soon after.
So I'll give him the benefit of the doubt just yet!