Chapter 1: What new mortgage borrowing rules are being introduced for first-time buyers?
First though, first-time buyers will be able to borrow up to five times their income from the mortgage lender, Nua Money. The Irish Independent is reporting this morning that it's the first time we'll have such a move since the financial crash. Nua Money has said strict lending criteria would apply to any exceptions and that they are being prudent.
Financial planner Owen McGee joins me on the line. Morning, Owen. Morning.
Good morning, David. Thanks for having me on.
Thanks for joining us. Now, people will be aware that there are rules set down by the central bank about exactly what you can borrow when it comes to a mortgage.
Chapter 2: How have mortgage borrowing limits changed since the financial crisis?
But there are exceptions.
Yeah. So if you think about a post-global financial crisis back in 2008, 9, 10, 11, the central bank made a move to say, right, we're going to put manners on the banks. And what we're going to do is we're going to put strict rules in place that at that time it was you could borrow up to three and a half times your salary and you have to have a minimum deposit of 10%. So what does that mean?
It means if you have a household income, say of a couple with 50,000 euros each, what started out as they could borrow three and a half times that, they could borrow ā¬350,000, three and a half times their combined income of ā¬100,000. Single person, ā¬100,000 by 3.5, same thing. Now, a couple of years ago, they said, okay, let's relax the rules a little bit.
And they moved it up to four times salary for first-time buyers, but they left it at three and a half times for second and subsequent buyers. So it's four times now is what the rule is from the central bank. But then the central bank kind of took a step back and said, you know what, this is supposed to be a commercial transaction. We can't interfere that much.
So what we'll do is, in 15% of cases, now not individual loans, but of your total loan book, and what I mean by that is, if you're a bank and you lend out 100 million, 15 million of those loans, you can have what's called an exception. So in other words, you can break the rules, right?
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Chapter 3: What exceptions exist in mortgage lending criteria?
And maybe that's to create competition. Maybe it's to... kind of put some reality into it that not every single case is exactly the same as going to fit into that criteria. So it was to give them some discretion and it meant that they could move from that.
Now, the interesting thing is, David, when it was three and a half times, it was kind of accepted within the market that if you got an exception, you got four types.
And then when it moved from three and a half to four for first time buyers, I actually spoke to the central bank at the time, a couple of years ago, and I spoke to the central bank and I said, does this mean that the exceptions are going to move from four to 4.5? And I was surprised because it certainly passed me by at the time.
The central bank told me, oh no, like we don't determine that four, the 4.5. An exception is an exception. So theoretically, they could do whatever they wanted.
They could do 10 times your salary.
Technically, they could. And in fact, I don't know if it's still the case in the UK, but two months ago, there was an article in the FT that basically said banks are, high street banks are doing six times at the moment. Now, David, you and I are old enough to remember the bad old days or the good old days where we were doing 10 and 12 times at the time, and it wasn't good for us.
And that's why the rules are there to say that these are the rules you have to stick to. And people are generally accepting. I know house prices have shot up and it doesn't feel like there's any control, but it is believed that if those rules weren't in place for 85% of cases, the house prices would have gone up even further than they already have in the last few years.
OK, difficult for many people to believe that, I'm sure, but absolutely things can always get worse. So the important thing to remember here, Owen, of course, is that banks would very much like to get their money back. So there is a big incentive for them not to do stupid lending.
Yeah, absolutely. So they have discretion over 15%. And it's not just on the multiplication of income. It can be also technically they could give you 100% mortgage.
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Chapter 4: What does the central bank's discretion mean for mortgage lending?
Technically, they could break the rules on what's called the loan-to-value ratio as well. So what does that mean? The amount outstanding on your mortgage... as a percentage of the value of your house. So if your house is worth 100,000, you have a mortgage of 90,000, that's a 90% loan to value. And the bank wanted people to have skin in the game.
They wanted you to have the 10% deposit to put it in, but technically they can break those rules as well. But let's, I'm going to be honest with you. I do like the headline. It does mean we're all talking about this this morning. But I'm sorry, Charlie. Charlie Weston wrote the piece. I'm sorry, Charlie. It feels to me like a little bit of a storm in a teacup.
Because what the banks are saying here, my understanding, and my industry sources have told me, that that particular bank knew who was asked the question.
this week oh you've never you have never done an exception before right they've never used their 15 and there's lots of reasons for that but they were asked the question if you were to use your exceptions are you considering doing this they might look at it in the future right if you were to do it what's the max you'd go to and they said oh in an absolute i'll give you exact word for word what i was told in a humdinger of a case in an absolute case where it was a no-brainer that this person can afford this mortgage we might go up to five times but they've never done it before
They've no plans to go and put a big sign above their door to say we're giving out five times. And the reality is, is that it would want to be an incredibly exceptional case for them to do it.
OK, so, I mean, as you say, any bank for 15% of their loans, they can ignore the rules. What would they take into account? I'm just thinking of listeners out there who maybe can't. get the mortgage they need for the house they want, but there might be sort of exceptional circumstances in their case. I mean, what sort of reason would a financial institution have for doing that?
I love this question because you know what? You don't know. It's totally a black box. We don't really know. And actually what can happen is traditionally what happened was when these were first introduced, you could only do is your exceptions were 15% of your loan book in the calendar year.
Which at the start of all this, the banks and the lenders have got better at managing this, but at the start of all this, if you were thinking of looking for an exception in November, you might wait till January to apply because all the exceptions have been used up. You could also find a situation where you walk into a bank branch in Ranelagh and they say, no, I can't give you an exception.
And you walk into the same bank, but just a different branch in Rathmines and they say, oh, we can't give you exception because that branch hasn't used up their exceptions. But in general, there's always the joke as well, if your mother and father were good customers of the bank, then you, the bank manager, would get it through too.
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Chapter 5: How does net disposable income affect mortgage eligibility?
And that's a reasonable point, isn't it?
And that's where the net disposable income does come into us, like after you've got it left, after you've paid the mortgage. And that is something that really frustrates people, right? They're looking at it and I'm totally making these numbers because I wasn't prepared for that texter's question, right?
But imagine you're paying rent of two grand a month and you work out the house that you want to buy is going to cost you 1,300 euros a month. And you're going, but the multiplication of your salary doesn't work out. That might be a perfect example where the bank says, that's worth an exception. We know this person has been paying two grand a month for the last five years.
They're likely going to pay it for the next 25 years. And that's a perfect example of where exception should be used and where they should be able to give discretion. And the reality is, it's interesting. Charlie, I'm very fond of Charlie. We chat a lot, right? But he put a line in there that I'm surprised at. He put a line in that article that said, nobody else is doing five times.
I wonder, is there any listener out there who's got five times in the last couple of years? Because I'd be shocked if nobody did. Like that you can say factually that nobody has done this because I'd be really surprised at that. And I think what's happened this week is it has. And you know what? It's great that we're having discussions about it.
But ultimately, 15% of the total lending done in Ireland can be done at the discretion of the bank and they can change the rules. It's not going to blow up our property market. It's only 15% of the market. Okay.
Final question, Owen. Even if you could get five times your income in terms of a mortgage, should you?
It depends. If I'm on half a million a year, I probably wouldn't worry about it. If I'm on 50 grand a year, I'd be terrified. That's the reality. But we also know like five times is at the bottom end of where we were. We were doing twice that. I remember situations where people would sign a letter in 2006, 2007 saying,
And they said, I am going to rent out two of the rooms and I'm going to have my income as well. They were adding the whole thing together and giving you 10 and 12 times. Like we all knew, we all know how that all ended and how it all finished up. I'm like, you know what?
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Chapter 6: What are the implications of borrowing five times income for mortgages?
But this suggests to me, we still remember the lessons we took out of 2008, that we're actually talking about it on the radio at five times and the number isn't 10 times. And I dread the day, David, where I get a phone call from the team inside at seven o'clock on a Friday morning saying, can you go on at nine? Because we're going to 10 times. I dread that day.
OK, Owen McGee, financial planner. Thank you so much for joining us this morning.