The Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Housing Loan Requirements) Regulations 2015, which came into force on 9 February 2015, introduced new regulations for lenders of housing loans advanced for the purchase of residential property. The regulations impose limits on loan to value and loan to income ratios for both primary dwelling house loans and buy to let mortgages.
In assessing the loan to value, the lender’s market valuation of a property may not be more than two months old by the time the loan is advanced. This two month time limit may lead to lenders having to revalue properties between the date of the initial loan offer and the date the loan proceeds are actually released to the borrower. This creates a risk for buyers in signing contracts for the purchase of residential property where they may be in difficulty obtaining their loan due to the valuation of the property changing. Aside from this risk, the requirement for a revaluation is likely to result in delays and further costs in the conveyancing process.
Two Month Valuation Period
If a sale does not conclude within two months of a lender’s initial valuation, a lender will be required to obtain an updated valuation of the property. Where the valuation of the property has decreased, a lender may withdraw or reduce its original loan offer. Consequently, a buyer may not be able to proceed with the purchase of the property, resulting in the loss of their deposit and leaving them open to be sued by the seller for breach of contract. Given the timelines in conveyancing transactions, in many cases a second valuation will be required.
In 2009, in the context of the property crash, the Conveyancing Committee of the Law Society of Ireland recommended that a buyer obtaining a loan to assist with the purchase of a property should request the inclusion of a special condition in the contract providing that the contract is conditional upon (i) the buyer obtaining loan approval and (ii) the buyer actually being able to comply with the conditions of the loan offer to draw down the loan.
The potential consequences for a buyer as a result of the introduction of the two month valuation period has heightened the importance of such a special condition and brought it into sharper focus. This has resulted in the Law Society recently repeating its recommendation that solicitors acting for buyers include a “subject to loan” special condition in the contract.
Ultimately, the inclusion of a special condition of this nature is a matter for negotiation and agreement between a seller and buyer in any given transaction but it is likely to cause friction, given their differing interests. On the one hand, a buyer will want the protection offered by the condition. On the other hand, a seller will want the comfort that it has a binding and unconditional contract.
It is not clear why the regulations prescribe a two month period for property valuations, a period which seems to have been decided without reference to the legal profession. Consultation with the profession would have revealed that a conveyancing transaction, from the time a property goes to ‘sale agreed’ to the date of advance of the loan and completion of the sale, can, in many cases, extend beyond two months.
While the objective of the regulations to “reduce the risk of bank credit and house price spirals from developing in the future” is to be commended, an extension of the two month period is required in order to reflect the realities of a residential property transaction.