The comments by the Governor of the Central Bank, Patrick Honohan, that he may consider a relaxation of the imposition of a 20 per cent deposit rule on new mortgage applicants have been welcomed by Sen Hildegarde Naughton.
The focus should have always been on proper stress tests of potential homeowners to see if they will be able to make payments well into the future, she said yesterday.
“A 20 per cent deposit requirement is open to abuse. What happens when someone borrows money from a family member to show they have the required 20 per cent deposit to qualify them for mortgage approval? Would we have a scenario where those with well-off family members are at a distinct advantage? There are ways around this rule. It is over simplistic and unfair.
“Speculation that the Central Bank is considering a mortgage to income ratio of 3.5 times needs further clarification. Would that be based on joint incomes or single incomes and does it take account of people who are on rising career paths? she added.
“Right now, the banks impose stress tests on applicants using the Central Bank dictated rule of a two per cent addition to the variable rate. This is to ensure that customers can continue to make payments in the event of a two per cent increase in rates. Why not remove the requirement for a 20 per cent deposit and increase the stress test application to three per cent over the variable rate. This is the real test of a sustainable mortgage and is a more sensible solution and way forward for those who wish to own their own home.
“If the Central Bank carries on with its proposal to impose 20 per cent mortgage deposits, many young people will have to postpone buying their home until they have the necessary deposit saved. The value of the property, in particular in Galway and other urban areas, may go up by between 10- 15 per cent in this time, which adds to the mortgage costs in the long run.
“Nobody wants to see a return to the days of light touch regulation but we must ensure that regulation imposed by the Central Bank is sensible and fair to young people who are simply trying to own their own home,” said Sen Naughton.
“Nor can we return to a debt fuelled property market which spirals out of control. The Central Bank must be vigilant that this does not happen again. This is not where we are, however. Bank lending is still at a very low level and while a substantial deposit as a requirement is the international norm, a 20 per cent deposit rate is an enormous ask for people starting off in life.
“Professor Honohan is right to ensure proper lending. He is right to ensure the property market is not overheated by the provision of unwise credit. Thankfully Mr Honohan is not one for light touch regulation and that is to be very much welcomed. However, we do not need regulation that effectively bars nearly every young couple in an urban area from owning property. I am glad the governor has indicated he is rethinking his decision,” she concluded.