The mortgage lending lowdown Sunday, June 27, 2010 With property prices significantly below their peak, there is value to be had for those who can afford to take advantage of the deals on offer.
However, many potential borrowers are being hampered by a tight lending environment.
And things are not set to change any time soon, with the Central Bank signalling last week that lending was going to become even tighter.
Last Monday, the Central Bank published a report on the future of banking, which discussed the need for a ‘‘more disciplined approach’’ to lending.
‘‘There is no direct regulation of credit limits, for example through restrictions on loan-to-value [LTV] ratios or the imposition of a maximum multiple of net disposable income.
This has meant that Irish households have been able to accumulate liabilities more easily than consumers in other countries,” the report read.
In the months ahead, banks may have less leeway in how they lend, according to the report.
‘‘We anticipate that, as part of a series of legislative amendments following the restructuring of the Central Bank, we will be given broader regulatory powers, which would include the ability to prescribe lending limits,” it said.
Lenders say they will await further direction from the Financial Regulator on the nature of any potential changes to lending rules. ‘‘It is too early to identify specific changes that could come about,” said a Permanent TSB spokeswoman.
But some lenders feel that changes to lending policy are inevitable on the back of this report. ‘‘The changes will, we believe, restrict the amount the society can lend to an individual and the purpose we can lend for,” said Irish Nationwide’s spokeswoman.
Since the credit crunch first hit, lenders have taken a much more restrictive view of mortgage lending, with potential borrowers coming under the microscope before they are granted a loan.
‘‘They are looking a lot more closely at all applications,” said Rachel Doyle, mortgage manager with broker group PIBA.
‘‘The focus is definitely on repayment capacity, with lenders wanting to see evidence of saving or paying rent to an amount that equates to the mortgage repayments.”
Doyle said that lenders were increasingly looking at specific spending trends.
‘‘For example, someone who is betting a lot online. It gives a profile of what the person is like,” she said, adding that lenders could turn down a mortgage application on any such ‘‘blip’’ in the current climate.
A savings record is key to securing a mortgage. Financial adviser Liam Ferguson said banks wanted to see that borrowers had saved the bulk, if not all, of their deposit themselves.
‘‘At the height of the boom, lenders didn’t worry so much about where you got the funds, be it a loan or a gift. Now they want to see evidence of saving,” he said.
Buying your own home
If you are buying your own home, banks will typically lend you a larger share of the purchase price than if you are buying an investment property.
The maximum LTV ratio - the percentage of the purchase price you can borrow - on offer from any bank for owner occupiers is 92 per cent.
This means that you need to have saved at least 8 per cent of the cost of your home, plus extra to cover things like solicitors’ fees and furniture.
Based on a purchase price of €250,000, this means you require at least €20,000 in the bank before a bank will even consider your application for a mortgage.
Some lenders may require you to have €50,000 stashed away to buy the exact same property.
AIB, Bank of Ireland and National Irish Bank will extend up to 92 per cent finance, while Irish Nationwide will lend a maximum of 90 per cent to owner-occupiers. KBC will lend first-time buyers or those trading up a maximum of 80 per cent of the purchase price.
EBS draws a distinction between first-time buyers and those trading up to a second or subsequent home.
The mutual will extend up to 92 per cent finance to first-time buyers, but those trading up can only borrow 90 per cent.
Permanent TSB also applies different maximum loan amounts for first-time buyers and those trading up, with 90 per cent finance for first-time buyers and 85 per cent for those taking their second step on the property ladder.
Ulster Bank current account holders can access mortgage finance of up to 90 per cent, but those who bank elsewhere can only borrow 80 per cent of their home’s cost.
Ulster Bank’s Secure Step mortgage provides finance up to 95 per cent for a limited number of developments.
When a customer draws down the mortgage, the developer who built the house will place an amount equal to 15 per cent of the purchase price on deposit with the bank, in a bid to protect consumers against falling property prices.
During the boom years, people in specific professions, with high future earning potential, could have secured 100 per cent finance.
This is no longer the case and lenders now say that a person’s profession does not affect the lending criteria.
However, brokers are adamant that people in certain industries, namely those most affected by the downturn, are finding it hard to secure finance.
Karl Deeter, operations manager with Irish Mortgage Brokers, said consumer protection rules meant banks could not openly discriminate against borrowers with a specific job.
‘‘They can’t do it overtly, but it happens,” he said, adding that banks would find a reason to reject an application if they wanted to.
Buying an investment property
For those hoping to secure a mortgage to buy an investment property, you will generally need to build up a larger deposit.
AIB and Irish Nationwide will lend up to a maximum of 75 per cent of the purchase price of an investment property, while EBS will lend up to 80 per cent. Ulster Bank will extend half of the purchase price for property investors.
Bank of Ireland will lend up to 75 per cent towards the cost of a holiday home, but said a rental property could attract finance of between 50 and 80 per cent, depending on a number of factors, such as the loan amount and the type of mortgage chosen.
However, banks that operate a more cautious approach to owner-occupier lending draw less of a distinction between lending criteria for the two segments.
For example, KBC will lend up to 80 per cent of the property price for residential investment mortgages, the same proportion it will lend for owner-occupiers.
Some banks, such as Permanent TSB, no longer operate in the buy-to-let mortgage market.
Restrictions based on property type or location
The type of property you plan to purchase and where it is located can have a significant effect on how much a bank is willing to let you borrow.
Frank Conway, director of the Irish Mortgage Corporation, said that those buying apartments in rural areas would find their choice of mortgage the most restricted, since many lenders had pulled back on this type of lending.
‘‘They lend for apartments in the cities, but if you are looking at other areas, there are large swathes of the country that are cut off,” Conway said.
‘‘The first preference from purchasers though is still a three bed semi-detached house with an option to expand.”
Deeter said a dichotomy existed in the mortgage market, with lenders least willing to lend for the properties that were most likely to have dropped in price, namely smaller apartments. ‘‘There are cheap properties out there that banks just don’t want to finance,” Deeter said.
Based on the restrictions at play, choosing to buy an apartment may mean that you require a bigger deposit. For example, Irish Nationwide’s maximum LTV drops from 90 per cent to 85 per cent if you intend to purchase an apartment, but the bank said the area that your new home was based in did not affect the loan amount.
With EBS, the maximum LTV drops to 85 per cent for apartments in major cities and 80 per cent for one-bed apartments in cities or any type of commuter belt apartments.
‘‘EBS does not typically lend for the purpose of purchasing apartments in rural locations,” a spokeswoman said.
Similarly, Bank of Ireland will only lend 85 per cent for those who wish to purchase apartments outside Dublin, Cork, Limerick and Galway.
If you wish to purchase a one-bed apartment anywhere in the country, Ulster Bank will generally not allow you to avail of its Secure Step mortgage offer.
And the bank will not extend a residential investment mortgage for a one-bedroom property either.
KBC’s lending criteria for owner-occupiers do not vary depending on property type, but a spokesman for the bank said that for residential investment property, the maximum LTV was determined by a number of factors, including rental demand in the relevant area.
‘‘For all properties in areas with more established rental demand, the maximum LTV is 80 per cent. For traditional houses in areas where rental demand is weaker, the maximum LTV is 70 per cent and for apartments where rental demand is weaker, the maximum LTV is 60 per cent,” he said.
AIB and Permanent TSB said their lending criteria did not vary by property type or location.
Calculating how much you can borrow
Each lender uses a different calculation to determine just how much they are prepared to lend you.
Typically, the key deciding factors will be your income, your spending habits and any other outstanding debts you may have.
Permanent TSB and Irish Nationwide base their calculations on net disposable income. Permanent TSB applies varying net income ratios depending on the mortgage applicant’s income.
Loans to those with income under €35,000must ensure that mortgage repayments do not exceed 30 per cent of net disposable income. However, someone earning €65,000 could use up to 37.5 per cent of their net disposable income to repay their mortgage.
The maximum amount of net disposable income that Permanent TSB will allow borrowers to allocate to their mortgage is 45 per cent, and this only applies to those with earnings over €125,000.
With National Irish Bank, borrowing is generally subject to 40 per cent of the applicant’s income being available to meet the mortgage repayments. A spokeswoman for the bank said this calculation was also subject to a 2 per cent interest rate stress test.
Bank of Ireland still operates on the basis of maximum income multiples, with the bank prepared to lend up to 4.75 times’ income depending on a mortgage applicant’s income level.
‘‘A further repayment capacity assessment is also carried out, details of which are internal to Bank of Ireland,” a spokeswoman said.
Some lenders play their cards close to their chest when it comes to revealing the secrets of how they decide your loan size, meaning potential borrowers can find it hard to understand just how big a loan they can secure.
A number of lenders were reluctant to give specific details to The Sunday Business Post, saying that mortgage applications were judged on a case-by-case basis.
EBS and Ulster Bank said a number of factors affected the loan amount, including income and existing debt. AIB said it did not base its credit assessments on multiples of income or percentages of income.
‘‘The main factor when assessing mortgage applications is long-term sustainable repayment capacity,” said AIB’s spokesman.
‘‘We assess an applicant’s repayment capacity on the basis of a maximum percentage of their net disposable income,” said KBC’s spokesman, adding that the bank used an interest rate that was considerably higher than the current one when calculating potential repayments.
According to brokers, some lenders stipulate a set amount that borrowers must have left in their current account each month after their mortgage is paid. ‘‘It’s typically about €1,500 for an individual,” Doyle said.
For couples, a ballpark figure of €2,500 was sometimes quoted, according to Doyle.
She added that this figure would tend to increase by about €300 per child.
Conway said that existing loans could significantly reduce your borrowing capacity.
He said someone paying €400 to €500 per month on a car loan could see their maximum mortgage amount fall by up to €70,000.
Negative equity mortgages
In recent weeks, there has been some suggestion that banks are actively considering the launch of negative equity mortgages, which would effectively see borrowers take on LTVs in excess of 100 per cent.
Such talk of a move away from the current cautious lending environment may be quashed by the sentiment expressed in last week’s Central Bank report, but for now it’s on the agenda. Irish Nationwide is one of the lenders considering the introduction of such a product.
‘‘We are investigating the possibility of transferring the mortgage from an existing property to a new property, subject to certain terms and conditions. This would be a limited product on a case-by case basis,” a spokeswoman said.
Ulster Bank said it would consider negative equity mortgages in exceptional circumstances, such as when an existing customer’s employment required them to relocate to another part of the country or they were trading down to make payments more manageable.
AIB, EBS, KBC, National Irish Bank and Permanent TSB said they had no current plans to launch a negative equity mortgage.
Brokers warned that banks might use introducing negative equity mortgages as a means of moving customers off costly tracker mortgages into more lucrative mortgage contracts.
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