Current mortgage rules are 'too blunt' and should be changed

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Current mortgage rules are 'too blunt' and should be changed

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Current mortgage lending rules are a “blunt instrument” and should be changed, according to a group representing the property and construction sector.

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Current mortgage lending rules are a “blunt instrument” and should be changed, according to a group representing the property and construction sector.

Property Industry Ireland has published its submission to the Central Bank as the regular continues its review of the lending rules.

PII – a trade association that’s part of IBEC – believes the ability to pay should form the basis of a loan, rather than a system based solely on income.

David Duffy, director of PII, told The Hard Shoulder he believes a more flexible approach is needed.

Current mortgage rules are ‘too blunt’ and should be changed – PII

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He said: “While [the rules] are an important part of the policy frameworks, they were introduced in 2015. The environment has changed – the interest rates have come down significantly… and we now also have the credit register.

“We think they should be changed… to a more flexible policy instrument, like a debt service ratio. We would still have regulation around it.

“At the moment, one of the measures is that you can only borrow three and a half times your income.

“In our view, that’s a very blunt instrument – what we’re saying is it should look at how much a household can afford to repay based on their income and other loans… and that should be used as the measure.”

PII says a debt service ratio (DSR) “calculates how much a household has available to spend after taxes and other loan repayments are taken into account”.

They say a DSR of 25% would allow a household with a gross income of €75,000 to get a mortgage worth €347,000 – compared with €291,000 under the current rules.

Supply is the ‘real problem’

Mr Duffy argued that the 3.5x income limit doesn’t take account of issues such as interest rates or debt, whereas a debt service ratio would be “much more flexible in the face of changing interest rates” while also taking account of income.

He said anyone looking to get a mortgage would still need to meet affordability criteria.

However, Edgar Morgenroth – Professor of Economics at DCU – suggested the proposal doesn’t fix the real issue in the housing market.

He said: “The real problem isn’t the lack of demand – it’s the lack of supply.

“What this measure is going to end up doing, if it’s accepted, is to increase demand even further which will push up the prices even more.

“Instead of spending a lot of energy on this particular proposal, we should spend a lot more energy on how to get additional supply on the ground. That will then take care of all these issues in due course.”

Mr Duffy said his group believes their proposal would actually increase supply.

He observed: “By moving to this measure, I think what you would see is it would provide home-builders with some additional certainty about the level of funded demand out there – that itself would bring about an increase in supply.”

However, the PII director acknowledged there are a “myriad” of issues in the housing market and other barriers that also need to be addressed.

Main image: File photo. Picture by: Francisco Martinez / Alamy Stock Photo.

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