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Mortgage rules will trap 'a lost generation' in rental market, Brokers Ireland claim

Mortgage rules will stay as they are in 2019 after the Central Bank said there was no need to alter the current regulations - prompting Brokers Ireland to claim it would trap "a lost generation" in the rental market.

Some welcomed the Central Bank move, which will keep the current loan-to-value (LTV) and loan-to-income (LTI) limits in place, although Brokers Ireland said the announcement was “very disappointing and will continue to force people into the rental market where there is a yawning gap between repaying a mortgage on a home and paying rent on a similar home”.

Rachel McGovern, Director of Financial Services at Brokers Ireland said it would force people to rent for longer.

“While it must be acknowledged there is a major issue with the lack of supply of suitable properties, nonetheless, the gap between repaying a mortgage and paying rent for a similar property is stark, with it being substantially more expensive to rent in almost every area of the country, incredibly even allowing for a 2% increase in interest rates,” she said.

“These rules by their very severity are most certainly contributing to there being a lost generation stymied in their efforts to begin their financial planning journey with the purchase of a first home, laying solid foundations with the discipline of mortgage repayments and building security for later years.”

In its 'Review of Residential Mortgage Lending Requirements' the Central Bank said that by limiting the extent of higher risk mortgage lending, it achieved its objectives of shockproofing banks and borrowers and dampening any possible credit-house price spiral.

"Wider housing market sustainability, affordability issues and the delivery of optimal housing supply spatially, socially and from an economic perspective, is beyond the scope of the measures and the mandate of the Central Bank," it said.

"House prices are not in and of themselves a target of the mortgage measures, as they are determined by multiple factors in the wider market.

"The pace of growth in new mortgage lending remains strong, but there is scope for further sustainable increases in mortgage activity."

It said while new mortgage lending continues to rise, it was not the most prominent driving factor in house price developments.

The Central Bank suggested the higher the number of mortgages fixed within the current boundaries, the better, adding: "The level of non-performing loans (NPLs), although decreasing, remains elevated for residential mortgages.

"In addition, Irish households remain amongst the most indebted in the European Union (EU) despite significant deleveraging since the onset of the last financial crisis."

While the Central Bank decision might cause frustration for many who are struggling to meet the criteria to secure a mortgage, Karl Deeter of Irish Mortgage Brokers said that while the 3.5 limit was flawed, not changing the rules now made sense.

"I think it's a good thing - just leave things alone," he said.

He said it did mean some people would have little option but to remain in an overcrowded and costly rental market, but that the Central Bank's remit was not to tackle shortcomings in the housing market.

Prof Ronan Lyons of Trinity College Dublin said of preserving the status quo that "doing nothing was probably the right thing".

"The Central Bank's job is really to just keep a lid on prices - it can't fix the supply shortage," Prof Lyons said.

"Doing nothing is probably the best corse of action."

However, he said the Central Bank could have addressed the current calendar imbalance when it comes to exemptions to the mortgage thresholds, where 20% of new lending to FTBs is allowed above the 3.5 limit and 10% of non-FTB new lending allowed above the 3.5 limit.

Rachel McGovern said the exemptions should be done away with.

"They lead to quite crazy situations whereby someone may have got an approval in January and then the same person with the same circumstances could go into the same lender later in the year and not be able to get approval," she said.

Prof Lyons said the current system meant it was in the lenders' interest to frontload those exemptions in the early months of the year, creating an unbalanced mortgage market and therefore an unbalanced housing market.

He said the Central Bank could address this on a rolling calendar year basis which would spread the exemptions further across a 12 month period.

The Banking & Payments Federation Ireland (BPFI) made a similar point and said it had advised the Central Bank on the issue.

It referred to growth in the mortgage market and said the total value of mortgage drawdowns in the first nine months of the year was €6.1bn, compared to €5.1 billion in the same period of 2017.

First Time Buyers and mover purchasers accounted for around 48.7% and 32.8% of that total in the third quarter of 2018 respectively.

However, it said BPFI member banks have encountered a number of "operational challenges", claiming a ‘smoothing process’ as between one year and the next would better enable lenders to manage the flow of approvals through to drawdown in a more measured way, while a ‘transition period’ between the announcement of any change to the rules and implementation would also help.

BPFI’s Acting Chief Executive, Maurice Crowley, said: “Managing and predicting how mortgage approvals translate into actual drawdowns present an on-going challenge to lenders to come within the exemption limits set under the macroprudential measures.

The Central Bank decision came as the Irish Fiscal Advisory Council said an economic slowdown a slowdown in the coming years was "inevitable" and also criticised the latest Budget.

In its Fiscal Assessment Report the IFAC said the Government's decision to increase spending by a further €1.1bn, largely due to health overruns, was "not consistent with prudent budgetary management".

It added that the Budget 2019 plans were "not conducive to prudent economic and budgetary management" and that "repeated failures to prevent unbudgeted spending increases have left the public finances more exposed to adverse shocks, with the budget balance in deficit rather than in surplus."

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