knowledge 21 October 2022 |

New mortgage lending rules announced by the Central Bank

On the same date, the CBI also published a ‘Mortgage Measures – Frequently Asked Questions 2022’ (here) and a feedback statement on its consultation on the review of the Framework (here).

Background

In 2021 and 2022, the CBI undertook a review of the Framework (first introduced in 2015) to assess if it remained fit for purpose. The CBI has acknowledged that while the Framework remains an essential policy instrument, there were certain aspects that need reform. The CBI concluded that while the Framework has worked as intended, the imbalance between supply and demand for housing has resulted in growing affordability pressures. On this basis, the CBI has determined that a ‘targeted recalibration’ of the Framework is warranted.

The Framework

The Framework will retain many of its original features, including the dual-instrument approach of using loan-to-income (“LTI”) and loan-to-value (“LTV”) rules. The targeted amendments made by the CBI relate to LTI and LTV limits for first-time buyers/second and subsequent buyers and allowances for lending above limits (these amendments are detailed further in the box below).

 

Targeted Amendments
First-time Buyers	First-time buyers will now have the facility to borrow up to 4 times their gross income, an increase from the previous LTI limit of 3.5 times gross income. The term “first-time borrower” has also been widened to reflect societal changes. This term may now include: borrowers who are divorced or separated, or have undergone bankruptcy or insolvency (where they no longer have an interest in the previous property); and borrowers who get a top-up loan or re-mortgage with an increase in the principal (provided the property remains their primary home). The LTV for first-time buyers will remain at 90%.
Second and Subsequent Buyers	LTV for second and subsequent buyers will increase from 80% to 90%. Second and subsequent buyers will continue to have the facility to borrow up to 3.5 times their gross income.
Lending above Limits	The Framework will continue to leave scope for a proportion of lending to occur above the specified limits. However, the CBI notes that the importance of this allowance will decrease with the introduction of the targeted amendments set out above. To reduce complexity in the Framework, the proportion of lending allowed above limits will now apply at the level of the borrower type (for example, first-time buyer) rather than at individual limit level (for example, first-time buyer LTI). The allowance proportions are now as follows: 15 per cent of first-time buyer lending can take place above limits; 15 per cent of second and subsequent buyer lending can take place above limits; and 10 per cent of buy-to-let lending can take place above limits.

No changes are being made to the limits relating to buy-to-let lending where a 70 per cent LTV limit will continue to apply.

Comment and Next Steps

The CBI emphasises that the lending limits set out in the Framework operate alongside lenders’ credit policies and “do not aim to replace lenders’ own prudent credit assessments which remain central to the functioning of the mortgage market”.¹

The BPFI has stated it will review the changes carefully in preparation for the application date of 1 January 2023.² Lenders should take note of the short window (just over 2 months) to prepare for implementation of the amendments to the Framework and plan accordingly.  

Also contributed by Jonathan Murchan