The Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Housing Loan Requirements) Regulations 2015 was signed into law by the Governor of The Central Bank of Ireland on the 9th February 2015. The main provisions of the regulations are well documented and relate to the amount of funds a lender can advance to a mortgagor, relative to the value of the property and gross income of the borrower. There is also the requirement that loan funds should be drawn down within two months of the date of the valuation of the property. These restrictions can have potentially serious implications for borrowers not only in their efforts to secure mortgage approval but also in relation to the completion of sales.
The regulations impose a Loan-to-Income (LTI) restriction of 3.5 times the borrower’s gross annual income for all new lending for principal dwelling homes. This limit also applies to borrowers in negative equity, who are applying for a mortgage for a new property. It does not apply to buy to let mortgages.
The level of the Loan-to-Value (LTV) restriction depends on the different categories of buyers. For first time buyers of Principal Dwelling Homes (PDHs) a limit of 90% applies on the first €220,000.00 of the value of the property and a limit of 80% for the value in excess of that amount. This means that a first time buyer purchasing a property for €250,000.00 will have to raise a deposit of 10% for the first €220,000.00 (€22,000.00) and a deposit of 20% for the remaining €30,000.00 (€6,000.00), bringing the total deposit required to €28,000.00. For Buy to let properties a limit of 70% of the value of the property applies.
The LTV and LTI limits do not apply to switcher mortgages or loans entered into in order to address arrears or pre-arrears of the borrower. For borrowers in negative equity who wish to obtain a mortgage for a new property the LTV limits do not apply but they are subject to the LTI limits.
The requirement that the lender carries out a valuation of the property within two months of the drawdown of the loan funds could result in a second valuation having to be carried out before closing. If there is a reduction in the value of the property, a purchaser could find himself in the position of having signed contracts and being unable to borrow sufficient funds to complete the sale. This could result in a loss of the deposit and the possibility of an action for specific performance and / or damages for breach of contract. The Law Society recommends that purchasers’ solicitors insert a standard mortgage special condition in the contract for sale. This provides that either party to the contract may withdraw from the contract and a full refund of the deposit shall be paid in the event that the purchaser is unable to draw down the loan within four weeks from the date of the contract for sale. This has been recommended practice by the Law Society for some time, however, solicitors for receiver and mortgagee in possession sales have been resisting such special conditions on the basis that contracts and title are offered on a take it or leave it basis. This is particularly the case with auction sales where the contracts are signed on the day.
The new requirements can lead to potential difficulties for both borrowers and vendors of residential property. Borrowers are faced with restrictions on the amount they can borrow. They can also run into difficulty in the drawdown of the mortgage, should the sale not close within two months of the initial valuation by the bank. The Law Society special loan condition protects borrowers from the more serious consequences of the inability to draw down funds, the 2015 regulations amplify the importance of this special condition in the contract for sale. Vendors, for obvious reasons, will not wish for the sale to fall through in a declining market.
In order to avoid unnecessary disappointment and expense for both the borrower and vendor, both sides should ensure the sale completes within the time frame for draw down of the loan.
- Vendors should ensure their house is in order e.g. NPPR certificates, Household charge and Local Property Tax receipts should be available well in advance of closing.
- Receivers and mortgagees in possession should have their tax numbers and any necessary letters of non-crystallisation releases etc. available prior to closing.
- Purchasers should ensure that their lender’s various requirements are complied with well in advance of drawdown.
For auction properties purchasers should be particularly cautious where they are purchasing by way of mortgage. Where the vendor refuses to allow the standard loan special condition Solicitors should advise their clients not to bid at auctions.
For more information please contact Richard O'Sullivan.
