The Central Bank yesterday announced it is removing the €220,000 cap on mortgage lending for first-time buyers who have a deposit of 10%.
This represents a shift from the existing rule which puts the ceiling at 90% for loans up to €220,000 but at 80% for the rest of the mortgage above €220,000.
Central Bank Governor Philip Lane said he decided to change the mortgage rules in response to rising house prices and higher incomes and to also ensure there was financial stability. He said there were two main reasons behind the Central Bank move:
“The change for first-time buyers is motivated by two main factors.
“First, the current system is complex and would require regular updating, given that the economic and financial impact of the €220,000 threshold would necessarily shift in line with the evolution of incomes, house prices and other factors.
“Under the new system, the measures should require adjustments only if wider macro-financial conditions – such as material shifts in credit patterns or financial stability conditions – warrant revisions.
“As an illustration, this simplification shifts the LTV ceiling for a €300,000 mortgage from 87.3 per cent under the previous system to 90 per cent.
“Second, there was evidence at the time of the introduction of the measures showing that first-time buyers defaulted less than second-time and subsequent buyers, with the differential in default probabilities especially strong in the case of lower-valued properties.
“However, the most recent data show that the differential in default probabilities is no longer weaker for higher-value homes than for lower-valued homes, eliminating an important justification for the current asymmetric treatment of lower-valued and higher-valued properties in the LTV regulations.”
With many experts fearing the move could lead to an explosion in houses prices, the governor said if the Central Bank notice any seismic effect on the property market they will intervene.
“If we see a material threat to financial stability we will act.
“If there is a rapid increase in house prices there will be a response from the Central Bank.”
The amendments mean that first time buyers will be able to borrow up to 90% of the value of a home, with borrowers needing a 10% minimum deposit.
However, the 20% minimum deposit requirement continues to apply to second and subsequent buyers.