Property's cheaper but money's tighter - still, competition in the mortgage market is good news for buyers. Finance Correspondent Simon Carswellreports

Anyone thinking about buying a property this year is right to feel confused about the turmoil in the financial markets and what it means when it comes to applying for a mortgage in 2008.

The global credit crunch, coupled with falling property prices at home and the tightening of lending criteria, has turned the property market on its head in a very short space of time. This is a unique situation, not just for property buyers seeking finance but for the bankers providing the loans.

It is slowly becoming a buyers' market, and while property might be cheaper, money is tighter. Gone are the days of easy access to 100 per cent mortgages and interest-only loans for speculative Irish residential property investments. Demand for mortgages is falling and lending criteria is tightening.

The situation is confused further by the stance of the European Central Bank (ECB) on interest rates. The ECB, which sets the bar for all mortgage repayments in Ireland, is torn between raising rates in an effort to keep inflation below 2 per cent - it is hovering around 3 per cent - and not exacerbating a precarious situation by increasing rates during one of the worst crises to affect the money markets in decades.

The consensus among economists is that the ECB will not increase the base rate above 4 per cent in the first half of this year, despite inflation running high. However, as economic growth in Europe slows from the middle of the year driven by a weaker US economy, the ECB is expected to cut rates in the second half of 2008. Buyers considering a variable or tracker mortgage should not expect lower rates in the next three to five months.

In fact, lenders have been increasing their standard variable rates and margins on tracker mortgages to cover the higher costs they are paying for their money in the inter-bank borrowing market because of the credit crunch. This week Bank of Ireland and ICS Building Society became the latest financial institutions to raise rates, following similar moves by Permanent TSB, Ulster Bank, First Active, IIB Bank and AIB.

From Tuesday Bank of Ireland and ICS increased their variable rate mortgages by 0.1 per cent and tracker mortgages by between 0.1 per cent and 0.25 per cent. This will add around €20 to a monthly repayment on a €300,000 30-year mortgage. Other major banks are expected to follow suit.

With rate cuts forecast for the second half of the year, this is also not the time to take out a fixed mortgage, despite the fact that some lenders including Bank of Ireland and Halifax, have reduced their fixed rate mortgages to lure switching mortgage-holders from other banks.

The prospect of rate cuts later in the year won't help activity in the mortgage market. Given the current conditions, the stand-off between buyers and sellers is likely to continue for some time as the market turns in favour of the buyer.

Prospective house purchasers may decide to bide their time some more and wait for borrowing conditions to improve and for prices to fall further.

This leaves sellers facing a gamble - they could cut prices now and secure a sell, or they could risk waiting to see if there is greater activity in the market - and possibly higher prices - later this year.

At that stage, the credit crunch should have eased, banks should have loosened lending criteria and ECB rates could be lower.

Paul Short, president of the Independent Mortgage Advisers Federation (IMAF), believes it could be up to nine months before the crisis eases and tracker rates fall again. "They might not go back to what they were 12 months ago but they should go back."

In the meantime, borrowers will have to undergo more stringent testing when applying for a mortgage as nervous bankers scrutinise mortgage applications crossing their desks more closely.

The greater the percentage of the house's value a buyer wants to borrow, the more probing the questions the customer is likely to face.

In addition to the usual questions on annual salary, debts and overheads, borrowers may now have to show examples of how similar properties have sold to prove they are not paying over the odds.

In a market where prices are falling, lenders will want to avoid selling a mortgage on a property on which the buyer could fall into negative equity. Interest-only and investment mortgages will not be sold as freely by banks as investors can no longer bank on rising prices to turn a quick profit on a "flip".

Only the most secure employees, including high-earning professionals and civil servants in secure jobs, are now qualifying for 100 per cent mortgages. Many banks have already tightened the lending criteria on these products. EBS Building Society has abandoned 100 per cent lending, while Bank of Ireland, First Active and Ulster Bank said they would only provide 100 per cent mortgages to public servants.

Anna Lalor, analyst with Goodbody Stockbrokers, said banks were only offering very high loan-to-value (LTV) mortgages in certain circumstances.

"If you were considered to be in a very secure job and there were no worries over your income, then banks will probably still provide high loan-to-value mortgages but not on the scale that they used to." Borrowers will inevitably have to provide a bigger deposit.

The amounts being offered to customers have also fallen. Paul Short says research carried out by IMAF shows that borrowers were getting on average 12 per cent less in mortgages in December 2007 than a year earlier. "Lenders are becoming much more discerning and cautious."

Being more prudent, the banks are looking for less risk and are turning to homeowners who have little debt owing on their properties. The switcher market for existing mortgage-holders will be the new battleground among lenders.

Anna Lalor believes the mortgage industry will become more of a "re-mortgage market" as homeowners take advantage of the large amount of value built up in their properties to secure better mortgage deals.

This is good news for home owners with low loan-to-value (LTV) mortgages. Not only will some of the banks pay your legal fees for switching, but competition has driven down tracker and fixed rates on low mortgages.

National Irish Bank, which fired the first salvos in this battle last year, and Halifax offer attractive rates on tracker mortgages on LTV mortgages of between 50 per cent and 80 per cent.

Paul Short believes that if the ECB lowers rates this year, there will be plenty of opportunities for borrowers/buyers, particularly if rents keep rising. "If interest rates come back a bit, then we will be back where we started - it will be better value to buy rather rent. It is all swings and roundabouts."