Mortgage lending rules need to be amended, PII says
The design and calibration of the mortgage lending rules need to be amended, an organisation representing the property industry here has argued.
Property Industry Ireland (PII) claimed the current measures are outdated and need to be changed to reflect buyers’ what a household can afford to spend, not what their income is.
The argument is made in a submission by Ibec affiliate, PII, to the Central Bank’s review of the macroprudential rules governing mortgages.
The measures were implemented seven years ago to help prevent another property fuelled boom and according to PII have met their objectives, but with the knock on consequence of stopping people with good incomes from owning a home.
The loan-to-income cap limits the size of a mortgage to 3.5 times the income of the individual or household that is borrowing the cash.
“PII is not calling into the question the importance or the benefits of the mortgage measures,” said Director of PII, David Duffy.
“They are an important pillar to managing the systemic and cyclical risk within the sector.”
“However, the design and calibration of these measures needs to be amended to reflect that the economic landscape is significantly different to when the existing measures were introduced in 2015, including the significant reduction in and much wider availability in fixed long-term interest rates.”
PII said the loan-to-income rules are currently among the strictest in the EU and advocates for a shift to a system based on Debt Service Ratio (DSR).
DSR calculates how much a household has available to spend after taxes and other loan repayments are taken into account, basing the calculation on affordability.
“DSR is fairer on households because it is focussed on how much a household can repay instead of what their income is,” Mr Duffy claimed.
PII said the current rules mean a single or combined income of €90,000 is required for purchasers to be able to qualify for 90% loan-to-value mortgage on an average property worth €350,000 and just 4% of households have incomes at that level.
“This restrictive mechanism is locking out a generation of young families and average income households from home ownership,” said Mr Duffy.
“Difficulties in accessing home ownership is leading to greater demand and inflation in the rental market.”
This is leading, Mr Duffy claimed, to a situation where rents in many areas are higher than mortgage repayments could be.
“Declining homeownership amongst our younger age cohorts and increased rental costs significantly impair their ability to own a home and save for a pension at the same time, leading to long-run implications for Irish society and Irish pension and fiscal policy,” he added.