100 per cent mortgages are gone, so are long-term loans – and the easily-flipped starter home is a thing of the past, writes FIONA REDDAN
WITH HOUSE prices down by as much as 50 per cent, property has never looked as affordable – or has it?
While prices may have plummeted, people’s incomes have also been slashed, due to a combination of higher taxes, pay cuts and the disappearance of discretionary income such as bonuses, while getting a mortgage has become more difficult as banks tighten up their lending practices.
Nevertheless, the collapse in prices means that first-time buyers are slowly coming back to the market. But what lessons should they have learnt from the crisis?
1 ASKING PRICE NOT SALE PRICE
What’s a house or an apartment actually worth these days? In the absence of official sale price data and with estate agents prevented from publishing prices (house prices are covered by the Data Protection Act) it is difficult to find out what is is really happening in the market.
Househunters have to rely on anecdotal evidence to gauge where prices really are.
Asking prices have been dropping and properties that have lingered on the market for months, if not years, are now likely to be pitched anywhere between 30 and 60 per cent off their original prices.
Official figures such as those produced by Permanent TSB show that house prices have fallen back by about 24.4 per cent since the peak recorded in February 2007, but estate agents say that house prices are down by as much as 50 per cent from peak.
Don’t rely on an asking price. If you are genuinely interested in a property, try asking a rival agent for a verbal valuation. They may have sold a similar property and could guide you on price.
2 BUDGET BEFORE YOU BUY
Banks are not the best arbiters of how much you can afford – you are – so do your homework before you go looking for a mortgage. First-off, you should model your income in various ways, such as what would happen if you lose your job, or you start a family and work part-time.
Generally, it is advised that you shouldn’t spend more than a third of your income servicing a mortgage.
You will then need to factor in other potential costs, such as home insurance, life assurance, and interest rate changes. Banks are obliged to stress test applicants’ ability to repay the loan at a minimum of ECB plus 2.75 per cent. It’s safe to work off an assumption that rates will go back up to about 4–5 per cent.
3 LOYALTY BACK IN FAVOUR
In the boom years, borrowers showed no loyalty, chopping and changing their bank accounts depending on who would lend the most. Now however, banks are looking more favourably on those who have long-term relationships with the institution. EBS for example, will advance 90 per cent of the purchase price to people who are trading up and are already customers of the building society, but will only advance 85 per cent to new trading up customers.
4 IT’S ABOUT THE DEPOSIT
“Home purchases should involve an honest-to-God down payment of at least 10 per cent,” says investment guru Warren Buffet and who are we to argue with the self-made billionaire?
With 100 per cent mortgages a souvenir of the boom years, banks are now looking for lower loan-to-values (LTVs), whereby the proportion of the loan outstanding is considerably less than the value of the property, in order to safeguard against prices falling.
Most banks are now offering to lend “up to” 92 per cent, while many borrowers will be expected to have a 20 per cent deposit, particularly if they wish to buy an apartment.
And remember, while banks are more reluctant to lend to borrowers who want high LTVs, and will “cherry pick” customers to ensure that they only lend to the less risky, they are also offering the best rates to those with lower LTVs. For example, AIB has a variable rate of 2.25 per cent for those with LTVs of 50 per cent or less.
5 NOT ALL BANKS ARE LENDING
If you’re wondering why your bank still hasn’t got back to you regarding your loan application, it may be because it is closed for new business. Karl Deeter, operations manager with Irish Mortgage Brokers, advises that while some banks aren’t in the market, AIB, Bank of Ireland, EBS, ICS and Haven are all actively lending.
But their lending criteria have become much stricter. “The main focus from banks is on the security of your job, which has become more important than what level of payment you get,” he says, adding that underwriting has become “pretty forensic”, with banks even going so far as to look at the accounts of smaller employers.
“One absolutely universal aspect of the current market is that lenders are becoming more conservative,” with banks returning to a lending environment last seen in the 1980s/1990s.
6 END OF 40-YEAR MORTGAGE
The new conservatism means that banks are also looking for shorter terms, with few banks offering 40-year mortgages. While longer term loans mean lower monthly repayments, they do significantly increase the cost of a mortgage. For example, €300,000 borrowed at 3 per cent over 40 years will add €215,497.57 in interest to the value of your mortgage.
Moreover, borrowing money over such a long term also means that you build up equity very slowly, putting you more at risk of negative equity. But, if you don’t have sizeable savings, Deeter advises that you may be better off getting a mortgage over 35 years, rather than going for a shorter term.
7 LOCATION, LOCATION . . .
The days of annual capital appreciation are behind us. Now it's back to the old estate agent's mantra of "location, location, location".
Economist Paul Murgatroyd recommends that first-time buyers should look in more mature, suburban areas, rather than newer apartment developments further out, which could lose value even further. Property purchase is no longer a matter of getting your foot on the property ladder, he says. Rather, first-time buyers need to be sure that a property is one they will be happy living in medium term, or possibly long term. Keep in mind that you don't have to move from that first home — and incur all of the transaction costs associated with selling and buying and moving again.
8 RENTING IS AN OPTION
If you're still nervous about the direction prices may take and would rather sit on the fence a while longer, renting is an attractive option.
As Ronan Lyons of Daft.ie points out, rents have fallen by about 25 per cent since the peak.
Rather than the old adage that renting is dead money, the drop in prices in today's market means that it's "not costing people a lot not to move". Renting gives you the flexibility to take the plunge when it most suits you, and as Lyons adds, he "can't see rents going up any time soon".
9 NO CHEAP MORTGAGES
With tracker mortgages no longer on offer, homebuyers are facing a tough time getting a good value product in the current market.
Variable rate mortgages, which can be increased at the whim of a bank, are on the rise, as cash-strapped banks look to cover costs. Already Permanent Tsb has pushed up its variable rate by 0.5 per cent, while the two larger domestic banks are likely to follow suit. As Deeter asserts, re-pricing on variable rates is almost an "absolute given", because banks aren't charging enough given the risks in the market.
The best alternative, says Deeter, is to go fixed, and he says there is still an opportunity to get a good deal. For example, Bank of Ireland is offering a one-year fixed rate for first-time buyers of 2.6 per cent, while it also has a five-year fixed rate at 3.5 per cent. But remember, fixed means fixed, and you will have to pay a breakage fee if you want to get out of the contract.
10 WHAT'S YOUR HURRY
With houses taking on average six months to sell, according to Myhome.ie's latest housing survey for the third quarter of this year, you can take your time considering your options. If the property has been on the market for longer than this, Murgatroyd cautions that it may be because it is over-priced, so take this into consideration when making an offer.
While it now looks unlikely that a property tax will be introduced in the near future, you might also want to wait until the forthcoming Budget to see if further changes are made to the stamp duty regime.
Finally, it will also take longer to get loan approval. But be patient and it will happen.
Bank of Ireland, for example, says that it is approving 80 per cent of loan applications.
