Q&A: Relaxed mortgage rules: What has changed?

Fiachra Ó Cionnaith looks at changes the Central Bank has made to mortgage rules and answers the questions that arise. 

What just happened?

The Central Bank relaxed rules controlling mortgages for first-time homes.

The new rules replace a previous system announced in February 2015, which was intended to prevent people from borrowing more than they could afford.

Previously, a first-time buyer had to save 10% of the price of a home up to €220,000 and 20% of any additional cost above this rate.

The February 2015 rules also said someone buying a second home had to save 20% of the entire price, and linked all of the above to a stipulation that a mortgage should not exceed 3.5 times a person’s income except in rare circumstances.

Under yesterday’s changes, a first-time buyer must now save just 10% of the cost of a home. These changes will come into effect from January 1, 2017.

Why did they do that?

It depends on who you ask. Officially, Central Bank governor Philip Lane said the changes have been made because the market is not the same now as it was in February 2015.

Mr Lane said the changes have taken place as house prices are continuing to rise, meaning it is difficult to meet the February 2015 deposit rules, and because household incomes are generally rising. He also stressed the old rules have simply been tweaked, not discarded.

A large part of this explanation is true. However, there is ongoing suspicion that Government pressure has at least partially led to the high-profile move.

Due to the linked rental and house prices crises, there has been increasing clamour for a rules relaxation from politicians.

In addition, the Government’s Budget 2017 help to buy scheme placed further pressure on the Central Bank to act.

I’m renting. Is it easier now for me to buy a home?

Yes, in theory. A person or couple trying to save enough money for a deposit now has to save less than under the previous system.

While it is not an exact science, a person or couple seeking to buy a €250,000 home now needs to save €12,500 for a deposit under the new rules and the help to buy scheme, compared to the €28,000 figure.

Similarly, for a €400,000 home, the deposit will fall from €58,000 to €20,000.

However, it is important to note that even if someone can afford this new deposit rate, the existing 3.5 times a salary limitation still exists.

I already own a home and may move and decide to sell it. Does this benefit me?

No. The new rules are focused primarily on first-time buyers, meaning little if any changes for those already on the property ladder.

Mr Lane addressed this issue a number of times yesterday, saying the evidence provided to the independent State financial group is that second home buyers are a riskier mortgage applicant than first-time buyers.

This means a decision was taken to retain the February 2015 rules for people who already own a home.

Will this increase house prices further?

This is the potential problem. Mr Lane yesterday attempted to downplay the potential risk involved.

However, speaking last night Fianna Fáil finance spokesperson Michael McGrath and others said while the new rules are welcome, they have concerns the unintended consequence could be a fresh surge in house prices.

This is primarily because if more first-time buyers have access to larger mortgages from banks, logic suggests house sellers may simply try to take advantage of the situation by increasing the cost of homes as more money is now available.