The rise in the cost of living is making it harder for prospective homebuyers to obtain mortgage approval.
prospective borrowers have less money to cover a home loan after paying household bills, so banks and other lenders limit the amounts they allow buyers and converts to buy. They also take into account record rate hikes by the European Central Bank, adding to affordability pressures.
The tighter lending standards come at a time when house prices continue to rise – up 13 percent in the year to July, according to the National Statistics Office.
ECB rates have risen by 1.25 percentage points over the past three months, with more aggressive rate hikes expected.
Rising interest rates mean lenders are now stress testing borrowers to assess their ability to keep up with higher monthly mortgage payments. A stress test is a measure of how a person’s finances will hold up if their circumstances change for the worse.
It means someone applying for a 3 per cent mortgage will be subjected to a stress test on the basis that the interest rate will rise to 5 per cent, said Martina Hennessy of broker Doddl.ie.
Higher interest rates mean higher monthly repayments, and record inflation means borrowers have less disposable income.
Stricter net disposable income requirements mean that each additional monthly fee of $50 to $70 for a single-income family reduces the loan amount by up to $10,000.
Borrowers are told that while they can borrow a certain amount based on the income limits set by the central bank, they trump the impact of rising costs of living on disposable income.
Not all borrowers will be affected, but the rising cost of living is proving to be a problem for many first-time buyers and those switching, especially single people and single-breadwinner families, Ms Hennessy said.
Rising household expenses come with higher interest rates, leaving people with less money to live on, so a mortgage’s repayment falls, limiting the total amount they can borrow.
The tightened income checks of the providers are particularly difficult for single people and couples with children – the lenders expect monthly costs of around 250 euros per child.
Permanent TSB and the Bank of Ireland recently tightened their lending criteria. Finance Ireland has also introduced stricter net disposable income requirements.
ICS Mortgages imposed severe restrictions on its lending last month and Avant Money and Finance Ireland have announced large mortgage rate hikes.
Broker Michael Dowling said most banks and other lenders have adjusted their net disposable income allowances over the past two weeks.
“The impact of rising costs like energy means borrowers’ disposable income has changed after paying off a mortgage,” he said.
Mortgage providers conduct stress tests at different rates. Some are testing whether borrowers can cope with a rate hike to 6.5 percent, while others are testing whether borrowers can repay when rates hit 5 percent.
This is because some providers add 2 percentage points to their fixed rate, while others conduct stress tests to see if a borrower can handle a 2 percentage point increase in interest rates over variable rates.
https://www.independent.ie/business/personal-finance/property-mortgages/buyers-struggle-to-get-mortgages-as-rising-prices-limit-loan-offers-41995940.html Buyers are struggling to obtain mortgages as rising prices limit credit offerings