Michael Dowling: Central Bank rules are very blunt for borrowers
The Central Bank is completing its review of the rules. The rules work by capping mortgage loans at 3.5 times gross salary; setting a 90% loan-to-value maximum lending up to a purchase price of €220,000 and establishing an 80% ratio on the difference above this figure.
On a purchase price of €300,000, the borrower can access a maximum of €262,000. Exemptions can apply.
A fifth of a bank’s total mortgages provided in any one year can exceed 3.5 times salary and 15% of a bank’s total mortgages provided in any one year can exceed the loan-to-value rule.
A borrower cannot qualify for both exemptions, and any application for an exemption is assessed on a case-by-case basis.
The effect of these changes meant mortgage lending of €4.8bn in 2015 when it should be €8bn based on the recovery made in the Irish economy over the last two years.
Lending this year is projected to be only €5.5bn. Sales of new homes are struggling and builders are reluctant to build because they are unsure if applicants will get mortgage approval.
Property prices have stabilised as a result of the changes. Among the main factors a bank considers before authorising a loan is that you must be permanently employed and have completed any probationary period.
If self-employed, a minimum of two years accounts will have to be provided.
If you are on contract employment in health, IT, or education you will be considered for a mortgage by providing a record of employment over the previous two-to-three years without any significant break in employment or a ‘letter of comfort’ from your employer confirming future employment.
Borrowers must also show for a minimum of six months evidence that they are saving and/or paying rent equal to the mortgage repayments, stress tested at interest rates ranging from 5% to 6.5%.
In simple terms, if you want to borrow €250,000 over 30 years, you must demonstrate a repayment capacity of €1,580 a month.
Having passed the Proven Repayment Capacity tests, borrowers must also have minimum net income available.
The stressed repayments are assessed as follows: A single person must have between €1,100 and €1,300 a month; a couple must have €2,000; and a couple with children must have €2,000 and €250 per child.
Borrowers must show monthly savings that are clearly evident in a separate bank account. You should save the same amount every month and do not withdraw from this savings account. You can save with whatever bank you chose but you must have a minimum of 5% of the purchase price saved.
However, the operation of your current account is a big factor in getting loan approval. The analysis of all transactions on your account by banks is surgical over a six-month period.
Having passed this rule, any failure to have a “healthy” current account means more and more borrowers will either be declined or advised to wait six months before they submit an application.
Under no circumstances can your current account have unpaid items, regular referral fees, or an overdraft at the end of the month before your next salary is lodged. Also, don’t pay your rent in cash.
If you have a credit card, do not withdraw cash from the account; do not spend disproportionately; do not just pay the minimum payment, and aim to clear the balance each month.
If you have an existing loan, it must be paid monthly and on time. It is imperative to have your mortgage protection cover approved by an insurance company. If you cannot get life cover, a bank has the right to refuse to lend you money.
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