First-time buyers clamber back on the housing ladder

Prices are rising, transaction levels are up and first-time buyers are back in the market, accounting for about one in every two property purchases in Ireland so far this year.

As Michael Dowling, spokesman for the Independent Mortgage Advisers Federation, asserts: "There is no doubt that we are seeing increased demand from first-time buyers [FTBs] who want to borrow money".

With the flow of lending starting to trickle again, and prices still at more realistic levels – despite the recent rises – for Dowling the biggest concern for first-time buyers in the Dublin area is “trying to find a suitable property to buy”.

“They typically want a three-bed semi-detached or terrace with a garden of some description, but there is a lack of supply for that kind of property,” he says, adding that he has seen “no interest at all in apartments”.

“I can’t recall when, in the last 12-18 months, I’ve last done a mortgage for an apartment.” he says.

But, while the headlines might point to signs of recovery in the property market, it’s still a volatile business and there is no certainty as to whether or not prices have stabilised for the longer term, even though they appear to be rising again in Dublin.

In this regard, Dowling notes “a sea change” in attitude among savvy first-time buyers, who are now opting to borrow what they believe they can afford – rather than what the bank might be willing to lend them.

So, if you feel that now might be the time to get that first step on the ladder, it may be time to do the sums. Having moved on from the days of banks offering special deals – such as free home insurance or valuations – to lure first-time buyers, choosing a lender is likely to come down to, firstly, who offers the cheapest rates and, secondly, who will lend to you?

How much can I borrow?
First things first. Before you even cast your eye over that property supplement or log on to view homes in your favoured area, it's worth considering how much you can afford.

Historically, banks decided how much they would lend based on a multiple of your income, or your joint income. So, for example, if you earn €45,000, you could borrow up to €168,750 based on a multiple of 3.75. Alternatively, if you are buying a property with someone else, you may be able to borrow 4.75 times the joint income.

However, these days a more commonly applied metric is how much disposable income you have. And this is where you can run into problems. If you have any outstanding credit card debt, or have regular costs such as childcare, for example, this will reduce your disposable income and may push you below the banks’ requirements.

For example, if you are single you can expect that the bank will want you to have about €1,300 left after servicing your mortgage each month. If you’re a couple, this figure will rise to €2,050, and if you have children, you can add on about €250 per child. So, while you may have a very healthy salary, if you have plenty of outgoings, this will reduce your capacity to borrow.

How much you can borrow will also depend on a bank's loan-to-value calculation – for example, AIB says it will lend up to 92 per cent of the purchase price, which means that you will need to come up with an 8 per cent deposit yourself. KBC, on the other hand, looks for a 10 per cent deposit – and, in reality, all the lenders would probably like to see larger down payments, as this limits the probability of a mortgage falling into negative equity should house prices slide again.

Who's lending?
While the two pillar banks, AIB and Bank of Ireland, might have dominated the mortgage market last year, there now seems to be a broader spread of lenders.

"The encouraging news for first-time buyers is now we have more banks lending," says Dowling, noting that Permanent TSB and Ulster Bank are back in the game. Not only that, but KBC Bank, which was only lending based on LTVs of 80 per cent, has now increased this to 90 per cent.

And there may be a new player shortly in the form of South African bank Investec, which is understood to be seriously considering entering the Irish mortgage market. However, its arrival may not be targeted at first-time buyers, as it may only look to lend to borrowers with lower LTVs of less than 85 per cent.

Remember though, that banks may be less willing to lend in certain parts of the State where property values are continuing to fall. For example, Dowling notes that, in Dundalk, some lenders will only lend 80 per cent of the purchase price.

Fixed or floating?
Given the tendency of banks to improve their net interest margins by hiking up variable interest rates over the past few years to cover their increased cost of funding, a variable rate mortgage can look like a risky product.

While it is dependent on the flows of European interest rates, such actions in recent times have also clearly demonstrated that such a rate can be easily – and frequently – manipulated at the whim of the bank.

For Dermot O’Leary, chief economist with Goodbody Stockbrokers, however, these days have likely passed.

“Variable rates have done most of the movement in terms of the spreads,” he says, adding that there is now “less reason” for banks to increase rates further, given their return to the bond markets earlier this year.

From a European perspective, he says that a “modest increase” in ECB rates may be on the horizon for the second half of 2015, though there is still a “small chance” that there will be a further reduction.

Given that fixed rates typically last for three to five years, for O’Leary there is now a “compelling reason” to stick with a variable rate.

Another option is to hedge against any future movement in interest rates by splitting your mortgage between a fixed rate and variable rate. For the risk averse, this can be an attractive option – and one which most banks offer – as it offers you more certainty in a time of rising interest rates.

“From a risk management perspective, if your major concern is an increase in the cost of borrowing, the way to mitigate against those risks is put some into a fixed -rate product,” advises O’Leary.

Getting lucky with the type of product you pick can reap huge rewards – but so too can opting for the best value provider. While you might be constrained in terms of who will offer you a mortgage in the current environment, opting for a bank with lower rates can also prove to be financially prudent.

And remember, the best way to lower the cost of borrowing is simply to borrow less. You will pay less interest, and you will also benefit from a lower rate – KBC for example offers a rate of 4 per cent for purchases with a LTV of less than 60 per cent.

Another consideration is the term of the mortgage. The shorter the term, the cheaper the cost of financing overall, but this may just not be feasible as it will mean that monthly repayments will be higher. While banks will no longer lend over a 40-year term, some will consider 35 years up to a maximum age of 70.

What's not included?
Remember that having enough money to cover the down payment won't be enough to secure your new home. You'll also need extra funds for additional charges.

The most significant of these charges is stamp duty, which, while dramatically lower than it used to be, can still be an unwelcome charge, levied as it is at the end of the process. The rate currently stands at 1 per cent, which means that a property purchased for €250,000 will incur a charge of €2,500, which must be paid before you can close the transaction.

And there are other costs. In days gone by, banks used to throw in extras such as free valuations, but you will now have to stump up the cost of this yourself. It can vary, but you should expect to pay between €100 and €150 for a bank-approved valuer to perform the task.

Home insurance (typical annual cost €330) and life assurance (mortgage protection) will also need to be considered, as no deal will go ahead without these two in place.

Legal fees are another issue. Typically, you would have paid about 1 per cent on the purchase price for conveyancing services: these days, however, you should look for a fixed-cost provider. Most solicitors will offer you a flat rate – probably in the region of €1,000-€1,500 – for the transaction.

Finally, local property tax was introduced in July of this year at an annual rate of 0.18 per cent. If you purchase a home midway through the year, remember that you will have to reimburse the vendor for a portion of this tax. However, you may be entitled to an exemption of this tax until the end of 2016 if:
a) you buy a new property between now and October 31st, 2016;
b) you are a first-time buyer and you purchase a home before the end of this year and;
c) you buy a property in a ghost estate.

What documents will I need?
The bank will require you to show a considerable amount of documentation before allowing you to progress with your mortgage application, so be prepared.

Firstly, it will want you to show proof of income, so you will need to come up with your latest P60 and at least three of your most recent salary slips.

In addition, the bank will likely request that your employer to fill out a certificate of income, detailing any additional payments you might receive, as well as confirming the terms of your employment. If you’re self-employed, it can get a little trickier, so be prepared to have at least two years of audited accounts ready, as well as a trading update for the present year.

You will also need to show that you have the capacity to repay – so evidence of having paid rent may be required, while the bank will also look for current account and loan account statements for the previous 12 months, as well as evidence of regular savings.

And remember, the bank will check your credit record before approving a mortgage, so to get a head start on them, you can get a copy of your record from the Irish Credit Bureau for €6 – after all, mistakes can happen.

Go figure: How much will it cost?

EXAMPLE 1:

What: Three-bed semi-detached

How much: €195,000

Where: Forest Hill, Carrigaline, Co Cork

Deposit: €19,500

Monthly repayments: €889.23

Annual property tax: €315

Stamp duty: €1,950

EXAMPLE 2:

What: Two-bed apartment

How much: €295,000

Where: Grand Canal Dock, Dublin 2

Deposit: €29,500

Monthly repayments: €1,345.25

Annual property tax: €495

Stamp duty: €2,950

Above examples are based on 90 per cent LTV, 30-year mortgage at interest rate of 4.5 per cent