The biggest issue affecting the housing market in Ireland over the past number of years has been the very low levels of supply of properties. One of the main reasons for this is the lack of building activity over the past ten years however over the past 12 months the level of building activity has increased and this is helping satisfy some of the demand that presently exists in the market. The level of mortgage lending is also reflective of the level of supply in the residential sector. According to the latest AIB housing market bulletin in the first three quarters of 2017 mortgage lending recorded a 32% yearly increase which indicated a full year aggregate in the region of €7.5 billion. This compares to a €5.7 billion total in 2016.
At present there are seven providers operating in the Irish mortgage market. Competition between lenders has dictated that the interest rates currently available from these lenders are exceptionally competitive but still significantly higher than the rates available from mortgage lenders in mainland Europe.
How much can I borrow?
All lenders have to strictly abide by Central Bank rules in terms of salary multiples that they can lend and loans to value. The maximum amount that mortgage applicants can borrow is limited to 3.5 times salary or combined salaries. The maximum loan amount available to first time buyers is 90% of the purchase price of the property while second time buyer are restricted to 80% of the cost of the property. The Central Bank allows lenders exceed these limits in special circumstances but each lender can only offer an exemption to the rules to 20% of their first time buyer mortgage applicants and 10% of the second time applicants. These exemptions are at the discretion of each lender.
Most lenders are now insisting that mortgage applicants save their house deposit and will not accept applications where the full deposit is being gifted to the applicants. For second time buyers, lenders will accept applications where the deposit is coming from savings or from the sale of their previous property.
A key issue with lenders when assessing a mortgage application is that the client can clearly demonstrate that they can make the proposed monthly repayments. This proof of repayment is normally made up of the clients showing that they have been paying rent or saving or a combination of both for a minimum of 6 months prior to the mortgage application. The lenders will stress test the proposed mortgage amount by an additional 2% on top of the prevailing variable rate and this is the figure lenders require the applicants to demonstrate that they can afford to pay when assessing the mortgage amount that people qualify for.
In the past lenders accepted guarantors, parents joining their children on the mortgage or monies placed on lien deposit as security when applicants did not qualify for the loan amount that they were looking for. All lenders have now ceased accepting such alternative security and now base their decision on the client’s income and proven ability to pay the proposed mortgage. It is interesting to note that Taoiseach Leo Varadkar was roundly criticised recently for displaying “posh boy” credentials by suggesting that people ask the “Bank of Mum and Dad” to help secure their deposit and that prospective house buyers should consider moving back home to help save for a deposit. Our experience of the current mortgage market is that close to 1 in every 2 first time buyers are availing of some level of parental gift while it is not unusual for perspective purchasers to advise us that they have moved back home to enable them enhance their savings and avoid spiralling rental costs.
What support is there for First time buyers?
In July 2016 the Government introduced the “Help to Buy Scheme” which is designed to help first time buyers who wish to purchase or build their own home. The Scheme allows a first time buyer of a new home/apartment or a self-build to claim a refund of income tax paid over the previous four years. The tax relief is limited to 5% of the purchase price to a maximum of €20,000. In order to avail of the scheme the maximum purchase price that first time buyers can purchase for is €500,000 and the mortgage amount must be greater than 70% of the cost of the property. No relief is available for properties costing over €500,000 or for first time buyers purchasing second hand properties. Where a new property is being purchased in joint names both purchasers must be first time buyers. The scheme is expected to run until the 31st December 2019.
What is the affordable mortgage scheme?
The Government recently unveiled a new scheme of low interest mortgages that will be available to the purchasers of properties worth up to €320,000 in the greater Dublin, Cork and Galway areas, while the ceiling for the rest of the country will be €250,000. This scheme is targeted at people who have been declined for a mortgage by the Banks and the Government has set aside €200m for the scheme. The scheme is reserved for borrowers with an annual gross income of no more than €50,000 or €75,000 for couples. The interest rate is fixed at between 2% and 2.5% over 25 to 30 years and these rates are considerably lower than the rates available from the Banks. Central Bank rules will also apply so borrowers can only take out a mortgage of 90% of the property value.
Can I refinance my mortgage?
Given the competitive interest rates that are presently available and the fact that a large number of existing customers are on historically high standard variable rates the Switcher market is now starting to take off. Switching mortgages is a straight forward process and most lenders offer incentives to customers (which cover the cost of switching) to move to them. Customers who are on variable rates of up to 4.5% can avail of, depending on their loan to value, fixed rates as low as 2.50% (APR 3.50% )for 5 years or 2.95% (APR 3.08%) for a 10 year period. With the expectation that interest rates may move upwards in the next 12 months these fixed rate options are extremely competitive and are proving very popular with consumers.
What if I want to buy an investment property?
One area of mortgage lending that lacks serious competition is the Buy to Let mortgage market. The reason for this is primarily due to the legacy issues that lending institutions have with Buy to Let mortgages. These mortgages are available from a number of lenders but the interest rate charged varies between 4.5% and 5.45%. This compares to rates of 3.10% for variable rate home loan mortgages. Banks also charge arrangement fees and legal fees when offering Buy to Let mortgages which, coupled with the rapid growth in property prices, reduce the attractiveness of Buy to Let properties to investors.
According to the Central Bank there were over 40,000 mortgages in arrears for over 360 days at the end of 2017 while there are now a total of 72,489 accounts in some level of arrears. Recent research carried out by the Central Bank found that these non-performing loans have hampered the Banks ability to supply credit and thereby offer lower interest rates than those currently available. The good news is that the overall number of mortgages in arrears fell recently for the seventeenth consecutive month.
To conclude on a positive note, recent figures indicated that more than 40,000 people were approved for a mortgage in the year end to November 2017. This represents an increase of 25% over the same period in 2016.The average mortgage approval amount is now €221,000. Moving forward it appears that even though there is an ever increasing supply of properties coming to the market the current mismatch with demand will continue for a number of years to come which will most likely result in house prices continuing to increase but at a much slower pace than over recent years.
Author: Gerry Hiney, Qualified Financial Adviser, Park Financial Planning, www.parkfinancial.ie