Central Bank announces targeted changes to Mortgage Measures Framework

• Changes follow a comprehensive review, including engagement with the public. New rules will take effect in January 2023.
• First-time buyers will be able to borrow up to 4 times their gross income.
• Second & subsequent buyers will continue to be able to borrow up to 3.5 times their gross income.
• Loan-to-value (LTV) for first-time buyers will remain at 90%. LTV for second & subsequent buyers will increase to 90%. LTV for buy-to-let buyers will remain at 70%.
• Lenders will continue to be able to lend a certain amount above these limits, in line with their own credit policies. 

The Central Bank of Ireland has today (19 October) published the conclusion of the Mortgage Measures Framework Review and announced a number of targeted changes to the measures. 

Over the past 18 months, the Central Bank has conducted a comprehensive review of the mortgage measures framework to ensure it remains fit for purpose into the future as the economy and financial system evolves. This review was informed by engagement with the public and a range of stakeholders, both in Ireland and abroad. Through a series of engagements – including a public survey with over 4,000 responses, a public consultation, listening forums and a conference – we have listened and learned. The review was also informed by the experience of countries with similar measures and by substantial research and analysis by the Central Bank.

While many things have changed since the measures were introduced in 2015, they remain an essential policy instrument to maintain financial stability. The measures have been working as intended and have strengthened the resilience of borrowers, lenders and the wider economy. The review reaffirms the benefits of the measures, through fostering a more sustainable mortgage market. The measures act as system-wide guardrails, and do not aim to replace lenders’ own prudent credit assessments, which remain central to the functioning of the mortgage market. 

At the same time, underlying structural challenges in the housing market remain and have intensified. At the core of these challenges is an imbalance between the demand for housing and the supply of housing. We are now building fewer houses, for a given level of house prices relative to incomes, than we did in the past. These trends have resulted in growing affordability pressures, with house prices and rents continuing to rise faster than incomes. The Central Bank’s view is that these challenges are best addressed by policies that improve the type and level of housing supply. 

However, the Central Bank is conscious that like all policy interventions, the mortgage measures have both benefits and costs to society. The higher house price to income ratios that have resulted from structural developments in housing supply mean that the economic costs of the measures have risen since introduction. 

To recognise these developments – and to balance the benefits and costs of the measures - we are announcing a number of targeted changes. 

The following framework will apply from 1 January 2023: 

A dual-instrument approach (using Loan to Income and Loan to Value) will be maintained. These lending limits operate alongside individual lenders’ credit policies and are not a substitute for lenders’ responsibilities to assess affordability and to lend prudently.

Loan to Income (LTI) sets a limit on the amount of money consumers can borrow relative to their gross income. This will move from a flat limit for all buyers to differential limits:

• First-time buyers can borrow up to 4 times their gross income. This is an increase from 3.5 times.
• Second/subsequent buyers will continue to be able to borrow up to 3.5 times their gross income.
• This change recognises the different roles played by different borrower types in the housing market. First-time buyers have been shown to be lower-risk in Ireland, and are generally at an earlier point in the income lifecycle and more likely to experience income growth during their mortgage.

Loan to Value (LTV) requires borrowers to have a minimum deposit before getting a mortgage. This deposit aims to create an ‘equity cushion’ to strengthen the position of consumers and lenders. 

• The LTV for first-time buyers will remain at 90%.
• The LTV for second/subsequent buyers will move to 90%. This is an increase from 80%. 
• This means that both buyer types will need to have a minimum deposit of 10%. 
• The LTV for buy-to-let buyers will remain at 70%. 

The use of allowances – which allows lenders to issue a certain amount of lending over the LTV and LTI limits – has been important to provide flexibility to cater for individual circumstances. Lenders will have allowances to permit 15% of their lending above these limits in each of the FTB and SSB markets. 

A number of changes are being made to the criteria required for a borrower to be considered a FTB for the purposes of the mortgage measures: 

• From a “fresh start” perspective, borrowers who are divorced or separated or have undergone bankruptcy or insolvency may be considered FTBs for the mortgage measures (where they no longer have an interest in the previous property); 
• FTBs who get a top-up loan or re-mortgage with an increase in the principal may be considered “first time”, provided the property remains their primary home 

Publishing the review, Governor of the Central Bank of Ireland Gabriel Makhlouf said: “The mortgage measures are essential in our mission to serve the public by maintaining the financial stability of the economy and households as a whole, so it is good policy practice to review these given the broader changes in the economy. While not always immediately visible to people in their daily lives, the benefits of the measures are long-term. 

“The level of engagement during the review from public and stakeholders was extremely welcome and provided us with a range of insights on the measures and the broader mortgage market. Our public engagement showed strong support for mortgage measures – over 70% of people who responded to our online survey believed that these types of measures have a permanent role to play in mortgage market. At the same time, it is clear that affordability and access to housing are key challenges facing many people in Ireland. At the core of these challenges is the need to increase the supply of housing.

“The review shows the measures have increased the resilience of borrowers, lenders and the broader economy. However, we are acutely aware that like all policy interventions, the mortgage measures have both benefits and costs to society. A lot has changed since the measures were first introduced. The changes we are announcing are both targeted and proportionate, and recognise the resilience built up over the last decade and the structural changes across the economy.”