Home buyers warned of ‘financial distress’ if they stretch to new mortgage limits

The Central Bank said last week it will raise the amount first-time buyers can borrow against their income and halve deposits for second-time buyers, from January.

But research done by the bank itself, and first reported in the Business Post, says a two or three point rise in mortgage interest rates could see buyers with “average” incomes spending up to 38pc of their take-home-pay on a home loan.

Buyers are more likely to be in “financial distress” once they are spending 35-40pc of their monthly net income on a mortgage, the Central Bank estimates.

First-time buyers with average incomes borrowing at the new limit of four times their salary over 30 years, could see 32-36pc of their take-home-pay going on their mortgage.

Movers – or second-time and subsequent buyers – who will continue to borrow at the 3.5 times income limit, could see that figure rise to between 35pc and 38pc.

But the rising age of average first-time buyers means that level of distress could be even higher, said economist Austin Hughes.

“The average first-time buyer has gotten older over the last while, so there may well be a significant cohort who have shorter mortgage terms because of that.

“Significant cohorts of prospective purchasers availing of the higher loan-to-income ratios could face conditions where debt would be approaching problem levels.”

The European Central Bank is poised to hike its main lending rate, with further rises expected into next year.

It follows two successive hikes since July. Critics say that loosening lending standards at a time of rising interest rates, especially given the tight supply in the Irish housing market, will further fuel price rises.

“It’s basically saying 10 more people can get on the bus, but the bus is still the same size,” Mr Hughes said.

“They would be better holding their power dry, even for another year, in that regard.

“Adding fuel to a fire which isn’t red hot at the moment, but is heating up and becoming more problematic, isn’t going to help anyone.”

Central Bank governor Gabriel Makhlouf said the rules could lead to a “modest” rise in house prices, which rose above Celtic Tiger levels earlier this year. The Central Bank said the new rules would boost available credit to households by 8pc, opening up the housing market to more renters.

The share of renters able to buy homes at the median price could return to 2015 levels, the bank said. The median price of a home was €295,100 in August.

“But it doesn’t take pressure off the rental market if the people can’t buy houses,” Mr Hughes said.