House prices may be falling, but home loans are becoming dearer and harder to come by, writes Caroline Madden

MANY FIRST-time buyers have decided to play a staring match with property sellers, refusing to blink until prices are cut to more affordable levels. However, this strategy may prove to be a double-edged sword, because the longer they delay, the more difficult it is becoming to get a mortgage.

Storm clouds are rapidly gathering over the mortgage market on the other side of the Irish Sea, with British lenders withdrawing thousands of home loan products because of increased funding costs attributable to the credit crunch.

Bank of Ireland last Friday temporarily pulled its mortgage products from the British market in order to re-price the loans and deal with a backlog of new applications.

Is Ireland immune to this malaise or is it surfacing here?

According to a spokesman for the Irish Bankers Federation, while mortgage lenders are exercising greater scrutiny and prudence, the changes aren't as pronounced. Many British lenders suspending new business are "niche players", he says, which are heavily reliant on the wholesale money market (where interbank lending takes place). Due to the global liquidity crisis, wholesale rates have shot up, making it costlier for banks to access funding.

Irish banks tend to have comparatively strong deposit bases and are less reliant on the wholesale market for funding, he argues.

"Few and far between would be the number of suppliers in this market . . . that would have a very high dependence on the wholesale model such as to make their business model unsustainable in the present environment," he says.

However, Michael Dowling, of the Independent Mortgage Advisers Federation (Imaf), warns that developments in Britain cannot be ignored. "Effectively all the banks are chasing the same pool of money in terms of borrowing money from each other, which allows them lend money to new customers," he explains.

Moreover, several Irish lenders are ultimately owned by British parent companies, so it's logical to expect a knock-on effect here.

Jack FitzPatrick, chairman of the Professional Insurance Brokers Association (Piba), expects products will start to be withdrawn from the Irish market.

There is no immediate evidence of that yet, but there are clear signs that lenders are beginning to feel the strain. Most glaring is the fact that 100 per cent mortgages have been all but scrapped. Where available at all, they are restricted to certain types of employees such as professionals and civil servants with guaranteed incomes.

According to Peter Bastable, managing director of Simply Mortgages, banks are only prepared to lend a maximum of 90-95 per cent of the value of a property now, a trend confirmed by other brokers.

Given that the average price paid for a house by first-time buyers in February was €254,697, this means that a deposit of €25,500 is typically required to get a foot on the property ladder.

Gary Owens, head of Irish operations at IFG Group which owns the State's largest network of mortgage brokers, said recently that first-time buyers who were being offered loan-to-value ratios up to the full value of the property this time last year were now receiving offers of about 80 per cent of the value. That would require the average first-time buyer to put down a deposit of about €50,000.

In addition to this sizeable lump sum, aspiring home-owners now face a greater level of scrutiny when applying for a mortgage. Lenders have become much more selective, adopting a more cautious "quality over quantity" approach and cherry-picking the most desirable borrowers.

"It is a more difficult time for first-time buyers trying to get funding," Imaf's Dowling says.

Borderline cases are less likely to make it over the line. "For example, if someone was on contract employment, in good times lenders didn't have a huge issue with that," he adds. "Now they're saying no, I'm only interested in somebody who's permanently employed."

Where lenders would once have factored in projected income from overtime or commissions, they might only take into account a percentage of such income now.

Bastable believes that banks are favouring mortgage applications for houses over apartments at the moment, because of the glut of unsold apartments on the market.

Perhaps the most worrying market trend from the first-time buyer's perspective is that mortgage deals are becoming much more expensive. Tracker mortgage rates - which are set at a certain percentage or "margin" above the European Central Bank (ECB) rate - have risen considerably for new customers in recent months.

Although the ECB rate has remained unchanged at 4 per cent, the three-month interbank lending rate has hovered at about 4.7 per cent since last September and has become the main driver of mortgage rates.

Bank of Scotland Ireland became the latest lender to bow to the pressure of higher funding costs this week, informing brokers on Tuesday that its tracker rates for new customers are increasing. For example, a customer borrowing more than 80 per cent of the value of a property worth less than €500,000 will now face an interest rate of 5.25 per cent (5.38 per cent APR) compared with the previous rate of 5.05 per cent (5.17 per cent APR). (In addition, the bank's fixed rate product is temporarily unavailable through its broker channel as a pricing review is being carried out.)

This increase follows hot on the heels of First Active's announcement last Friday that it was raising new home loan rates because of increased funding costs.

"There's no doubt you're going to see other banks change the margins that they charge and unfortunately the change will be upwards in terms of higher interest rates for customers," Dowling predicts.

In light of this, Imaf members are strongly advising customers who have made the decision to buy a property and have a formal loan offer in place, to draw down the money rather than delaying, as there is no guarantee that the rate currently being offered will still be available a few months down the line.

As well as making mortgages considerably more expensive over the lifetime of the loan, higher interest rates are also having an impact on affordability. Lenders have to factor higher monthly repayments into their stress test calculations, which reduces the maximum loan that they are prepared to give.

According to FitzPatrick, a borrower who would have been approved for a home loan of €350,000 a year ago might only get €300,000 now. Although falling house prices may provide some solace for first-time buyers, they have not yet dropped far enough to compensate for higher mortgage rates.

A number of economists predict that the ECB will cut rates twice before the end of the year, but even if these cuts materialise, they are unlikely to deliver a reprieve for borrowers or improve affordability, because the link between mortgage rates and the ECB rate is becoming increasingly tenuous.

Emer Lang, banking analyst at Davy Stockbrokers, says there is "absolutely no guarantee" that banks will pass on any reduction in rates. The Bank of England has cut base rates three times in the last five months, but these reductions have not been passed on to customers by lenders, who have instead been using them as an opportunity to claw back some of their funding costs. This seems the most likely scenario to unfold here if the ECB reduces rates this year.

FitzPatrick says the only thing that can keep mortgage rates from rising further is more competition, which is unlikely given that everyone is pulling in their horns to weather the credit crunch.