Central Bank's new rules allow bridging finance

Brendan Burgess

Brendan Burgess

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www.centralbank.ie

Central Bank – Targeted Amendment to Mortgage Measures for Principal Home Bridging Loans

The Central Bank of Ireland today announced details of a targeted amendment to the mortgage measures that will exempt certain principal home bridging loans from the Loan-to-Income (LTI) limit. The Loan-to-Value (LTV) limit will continue to apply to these products, and all other elements of the...
www.centralbank.ie www.centralbank.ie

Certain types of bridging loans – defined as “principal home bridging loans” – are exempt from the loan-to income (LTI) limit. A principal home bridging loan is a home loan to facilitate the purchase of a property intended as a principal home prior to the sale of an original principal home. The repayment of the bridging loan is related to the proceeds from the sale of the original property (rather than through regular loan repayments). This makes the LTI limit, which has the main aim of promoting affordability, less relevant for this type of loan.

Consequently, principal home bridging loans are exempt from the LTI limit that applies to first time buyers (FTBs) and second/subsequent buyers (SSBs). The loan-to-value (LTV) requirement is an important element, however, as it provides a buffer against the effects of house price falls, which could push borrowers into negative equity at the time of repayment. Therefore the LTV limits will continue to apply and, in practice, the LTVs on products of this nature would be much lower than the limit prescribed by the mortgage measures.

A principal home bridging loan is defined as:

  • A loan for the purposes of purchasing a principal home
  • Having a term of 18 months or less
  • Not having a contractual obligation on the borrower to repay the loan principle until the house is sold or the loan term ends.
The mortgage measures are not a replacement for responsible lending standards by lenders nor the application of suitability requirements. Lenders must be satisfied that mortgages are suitable and affordable for each individual borrower and are required to effectively inform consumers to enable them to make informed decisions.
 
I don't understand this bit

Bridging loans can also be used when purchasing a house for investment purposes. The mortgage measures already have specific limits applying to buy-to-let (BTL) buyers. As the measures only impose an LTV limit for BTL lending (with no LTI limit applying) no changes
are being made to the measures in this case.

I own a house worth €500k with a €400k mortgage. I want to buy an investment property for €500k and I have the €150k (30%) deposit required.
Where does bridging come into it? If the bank wants to lend me the €350k, they can. The existing rules allow them to do so as the LTI limits don't apply.
 
I just got a response from the Central Bank which confirms that it's 90% of the existing home.

The targeted amendment to the mortgage measures exempts principal home bridging loans from the loan-to-income (LTI) limit (for FTB and SSB lending). The loan-to-value (LTV) requirement remains – 90% for FTBs and SSBs – and is to be applied to the original principal home for the purpose of compliance with the mortgage measures. The LTV requirement is an important element of the mortgage measures as it provides a buffer against the effects of house price falls, which could push borrowers into negative equity at the time of repayment.

In your specific example of a homeowner with an existing principal home worth €1 million, for the purposes of the mortgage measures, the maximum LTV would be 90% of the value of that property.
 
I have deleted the posts which all misunderstood the Central Bank's statement.

I have a house worth €700k - mortgage-free and I want to trade up to a house costing €900k.

The bank can lend me 90% of €700k or €630k. I will have to have €270k of my own cash.

I buy the house for €900k with a mortgage of €630k.
I sell my existing house and repay the mortgage.

So I will continue to be mortgage-free.

That seems too conservative.
 
Let's take a more typical case.

House worth €500k
Mortgage €200k
Equity €300k

I want to trade up to a €700k house.

Sell my house first and realise a net €300k
Borrow €400k and buy the new house.
My income is €150k - so the LTI would allow me borrow up to €450k

The new rules don't help me.
The bank can give me and extra €250k on my existing home.
Not enough to buy a €700k house.
 
Makes sense.

(although you would need to be very creative to reach that interpretation from the actual wording of the rule change).
 
So trading down will always be possible so long as the house to be bought is less than 90% of the value of the existing house.

Trading up will be rare enough. You will effectively need to be mortgage-free and have a pile of cash.

Brendan
 
Can you have a mortgage and a bridging loan at the same time? Honestly, that is what a bridging loan is supposed to be for.

If you have a 700k house mortgage free, then you can borrow up to 630k as a bridging loan.

If you want to buy a 900k house, then you only need 270k for the actual mortgage. That is well below 90% LTV and also also probably less than 3.5 LTI.

It could be a policy plan, that it only helps for people who are downsizing (which the state wants people to do to free up housing).

This policy would be clearer.

Main mortgage LTV:
mortgage <= 90% of the new property (secured on new property)

Bridging LTV:
bridging loan <= 90% of the old property equity (secured on old property equity)

LTI:
main mortgage <= 3.5X income

The bridging LTV should be lower, e.g. 80%, to account for the risk of a price drop before it can be sold.

If a house is worth 500k with a 300k loan, then the current mortgage lender would have a 300k liens. The bridging loan would be inferior to that mortgage, so risk is even higher for the bridging loan. At 90% of equity, the bridging loan could be up to 180k.

If house prices dropped 10%, then the house would sell for 450k with only 150k of equity left to cover the 180k bridging loan.

Alternatively, the bridging loan could be secured against the equity in the old house and the value of the new house. If the bridging loan was from a different bank, then that would lead to questions of which loan was superior.
 
Not to undo your examples, but the bridging I have seen (most typically) is for downsizing, not moving up the chain. A person has a house worth €800k and wants to downsize but can't get a mortgage/doesn't qualify, so they'd like a negatively amortizing bridging loan so they can secure the new place then sell the original one, cover the interest from the proceeds and still be debt free.
 
Bridging loans can be stressful. Especially if your sums don’t add up. And even worse is if you discover the sale of your current homes runs into the following issues

- sale price is way off
- something wrong with planning
- falling house prices
- purchasers pulling at the last minute
- something wrong in the legal documentation
- the bank has lost or misplaced your title deeds

Naturally the Cental bank has mention this is their literature, and banks are obviously pointing it out to potential brindgers….

(I see in the UK top end houses are failing to sell at top prices)
 
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