Buyers struggle to get mortgages as rising prices limit loan offers

The high cost of living makes it difficult for potential homebuyers to get approved for a mortgage.

Potential borrowers have less money to cover a home loan after paying the family bills, so banks and other lenders limit the amounts they agree to for buyers and switchers. They also take into account the European Central Bank’s record hikes in interest rates, which add to the pressure on affordability.

The tougher lending standards come at a time when real estate prices continue to rise — they were up 13 percent in the year to July, according to the Central Statistical Office.

European Central Bank interest rates have risen by 1.25 percentage points in the past three months, with additional strong hikes expected.

Rising rates mean that 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 falter if their circumstances change for the worse.

This means that someone applying for a mortgage at 3pc is stress tested on the basis that the interest rate will go to 5pc, said Martina Hennessy of brokerage Doddl.ie.

Higher interest rates mean higher monthly payments, and record inflation causes borrowers to earn less.

The stricter net income requirements mean that each additional €50-70 per month in the costs of a single-income family reduces the amount they can borrow by up to €10,000.

Borrowers are told that although they can borrow a certain amount based on income limits set by the central bank, the impact of cost-of-living increases on disposable income outweighs it.

Not all borrowers are affected, but the rising cost of living is proving to be a problem for many first-time buyers and switchers, particularly singles and single-income families, said Ms. Hennessy.

Higher family costs combine with higher interest rates, with the result that people have less money left to live on, so what they can pay off on a mortgage goes down, thus limiting the total amount they can borrow.

The strict disposable income tests imposed by providers are particularly difficult for single applicants and couples with children – the lenders factor in monthly costs of around €250 per child.

Permanent TSB and the Bank of Ireland recently tightened their lending criteria. The Ireland Finance Agency has also imposed stricter net disposable income requirements.

ICS Mortgages last month imposed severe restrictions on its lending, and Avant Money and Finance Ireland announced significant increases in mortgage rates.

Realtor Michael Dowling said most banks and other lenders have adjusted their net disposable income provisions in the past two weeks.

“The impact of rising costs such as energy means that the income available to borrowers has changed after the mortgage is paid off,” he said.

Mortgage providers perform stress testing at different rates. Some are testing to see if borrowers can cope with interest rates rising to 6.5%, while others are testing whether borrowers can repay if rates reach 5%.

This is because some providers add 2PC to their fixed rate, while doing other stress tests to see if the borrower can handle the 2% higher rates compared to the variable rates.