Requiring first-time buyers to come up with a deposit of 20 per cent to purchase their first home is "unduly restrictive" and may make it impossible for many to secure a mortgage, the Department of Finance has said in a submission to the Central Bank's mortgage lending consutlation.
In its response to the Central Bank’s consultation on mortgage lending restrictions, which closed yesterday, the Department of Finance has called for a more “nuanced” approach to limiting the amount that people can borrow to purchase a home, as it called for a more “graduated” approach to the introduction of the rules.
While the Department notes that there is “sound rationale” for the introduction of macro-prudential measures, they also have “wider economic and social impacts” which need to be taken into account.
Pointing to the example of Norway, which introduced a loan-to-value limit of 90 per cent and subsequently reduced it to 85 per cent, the Department said that an initial 90 per cent limit could be introduced, and then worked downwards over a period. The Department also suggested both the LTV and income multiple measures should be more closely linked, which could allow someone borrow at 90 per cent, if they can meet the proposed income ratio.
Describing LTV ratios as a “blunt” instrument, the Department said it doesn’t place the central focus on affordability and repayment capacity.
In its response, the Department also warned against the negative impact such measures might have on sustainable economic recovery or unintended social impacts.
“If the level of a deposit becomes a central criteria over time in obtaining a mortgage it could lead to a concentration homeownership in the wealthier and higher income groups in society,” it said.
The Department also warned about the impact the rules could have on the rental market, noting that it could result in an “upward shift” in demand, which could lead to a “potentially significant rise” in rents in the short to medium term.
On the issue of whether or not mortgage insurance should be introduced to fill the gap from 80 per cent to 90 per cent LTV, the Department said it requires in-depth consideration, but that it doesn’t see the State “playing a role” in underwriting or guaranteeing this.
The Central Bank’s proposals, which are designed to prevent future shocks to the Irish property market, were published in October, and if implemented, will mean that borrowers will be required to have a 20 per cent deposit before being approved for a home loan, although exceptions can be made by banks in 15 per cent of cases. In addition, lenders must limit mortgages to three and a half times incomes, with the exception of 20 per cent of cases.
Response to the consultation
The Central Bank said on Tuesday that response to the consultation was "very high". The regulator received 157 responses in total; 110 from individuals and members of the public and 47 from industry groups, financial institutions and other interested parties. All submissions will be published on the Central Bank's website in due course.
Once the submissions have been “carefully considered”, the Central Bank intends to announce its regulations “shortly”, in order to “shorten the period of uncertainty as much as possible”.
“After making any appropriate refinements, we will move quickly to confirm the parameters of the final regulations.”
While an original date of January 1st had been given for the introduction of the new rules, the Central Bank said that the final measures will now come into effect in “early 2015”.
