Central Bank's warnings fail to deter banks and borrowers

Despite concerns over growing indebtedness levels, First Active's 100 per cent mortgage is aimed at the financially vulnerable first-time buyers, writes Laura Slattery

Ah go on, take the money, say the lenders. Don't say we didn't warn you when it all goes wrong, says the Central Bank.

In a week when the Central Bank's governor John Hurley spoke darkly about the consequences of high and growing levels of indebtedness in the economy, one mortgage lender broke ranks by offering a 100 per cent mortgage to first-time buyers.

At the same time, another lender co-authored a report suggesting that, although average household debt is certainly climbing - at an annual rate of 25 per cent - most of us are quite relaxed about it.

First Active's offer of a mortgage covering a property's full purchase price will seem like excellent news to wannabe first-time buyers struggling to save the 8 per cent deposit usually required.

"We have people coming to us who may earn enough to qualify for a €300,000 loan, but, before they can even look at a property, they need to have €24,000 sitting in their bank account," said the lender's head of marketing, Brendan O'Hora. Now there's no need.

First Active's move has surprised mortgage brokers, although it is likely that many will be quick to capitalise on the move. Just a day after the launch of the 100 per cent loan, one broker sent round a text-message invitation to borrow: "Breaking news for first-time buyers - no deposit necessary, 100 per cent new loan package available."

But another broker believes the product sets a "dangerous precedent" that will fundamentally alter the property hunters' mindset, for whom drawing down a mortgage will be the biggest financial transaction of their lives.

"It is rather strange that in a week in which John Hurley expressed concerns about the high level of debt, a lender comes out offering 100 per cent funding to first-time buyers," says Michael Dowling, president of the Independent Mortgage Advisers' Federation (IMAF).

Full funding mortgages were already available to certain categories of professionals with proven earning potential - doctors, solicitors, accountants and the like.

But these groups, whose incomes could be expected to rise in the short-term, tended to have savings anyway and didn't all flock to borrow 100 per cent.

"Nobody was shouting from the rooftops looking for this product," says Mr Dowling.

"That's not to say, now that we have it, people won't go for the easy option and give up the savings habit.

"I would be concerned that the people most likely to go for it are the ones who are most vulnerable if interest rates were to increase or if there was any wobble in property prices."

It is this potential wobble in prices that preys on the minds of conservative central bankers, whose warnings come in the context of a marked slowdown in the market.

The "welcome deceleration" to a year-on-year increase in house prices of 7 per cent, against a background of increased supply, should be matched with a corresponding set of brakes in mortgage growth, according to the Central Bank.

"The point of most concern about the high and growing level of indebtedness is that it is occurring at a time of historically low interest rates, so that any significant increase in rates or downturn in economic activity in the future would cause problems, particularly for recent and more highly indebted borrowers," said Mr Hurley. Negative equity, where householders owe more than the value of their homes, is a sticky situation for anyone but if the unthinkable happens and the property market starts reversing, those who borrow 100 per cent of the purchase price will be the first to find themselves in such a predicament. Borrowers who, up to now, could borrow only 92 per cent of the purchase price of their homes automatically have equity built up in their properties. Their deposit is something of a cushion, albeit one that is theirs to lose.

Mr Dowling believes borrowers who have had the discipline of saving for a deposit tend to have a more responsible attitude to debt than those who don't have to bother, leaving them better able to cope when times get tough.

Other brokers point out that first-time buyers won't actually be taking on any extra debt under the 100 per cent loan. They will still only be able to borrow within First Active's normal lending criteria, under which repayments on a loan cannot exceed 40 per cent of net disposable income.

Although it is not required to get approval for specific products, the lender has held discussions with the financial regulator about the new product.

The financial regulator, which forms part of the Central Bank and Financial Services Authority of Ireland, said it had ongoing discussions with all lenders and had asked them to ensure that strong checks for loan approval are in place. Following a review of lending practices two years ago, the regulator requested lenders to review their practices in relation to verifying income and the funding of deposits to ensure that borrowers were able to repay their often intimidating loans.

Lenders were also reminded of their obligation to stress test loans, checking if borrowers could cope with the higher repayments should interest rates rise.

First Active stress tests its loans at 2 percentage points above its standard variable rate, meaning borrowers must be able to make repayments based on a rate of 5.53 per cent without exceeding the 40 per cent of income limit.

This is "quite prudent", says Sarah Wellband of REA Mortgage Services, who points out that most of the Central Bank's previous grumbling about the economic horrors of consumer debt have concentrated on unsecured borrowings like credit cards and personal loans, not mortgages.

A report published by IIB Homeloans and the Economic and Social Research Institute (ESRI) implies that this high-interest, unsecured debt is causing more difficulties than low-interest mortgage debt, which many consumers view as an inevitable commitment.

Although average monthly mortgage repayments have increased from €500 to €595 in the past year, the percentage of those who find their mortgage a heavy burden has remained relatively stable at 15.4 per cent.

But for those who are heavily burdened, the situation appears to be getting worse. Last year, their average repayment was €714. It has now climbed to €918.

And the Central Bank's concerns that more recent and heavily indebted borrowers are more at risk from personal economic ruin appear to be backed up by IIB/ESRI's research.

Over a fifth of people who bought property since the start of the boom in 1996 described their mortgage repayments as a heavy burden, compared to just 8.9 per cent of the lucky generation who bought before 1996.

For its part, First Active says it is applying all the principles of prudent lending, including the usual credit checks and requiring applicants to have a solid three-year employment record.

"Taking out a mortgage and buying a property is a big deal. It is not something people should do lightly," says Mr O'Hora.