It's not necessarily easier to buy, as banks become more restrictive, writes Fiona Reddan

PLUNGING HOUSE prices, rapidly declining interest rates and an increase in mortgage interest relief are all conspiring to make it cheaper than it has been for a long time for first-time buyers to get on the first rung of the property ladder.

However, stricter lending policies at mortgage providers, combined with uncertainty over the future direction of property prices and rising unemployment, means that it is still a very challenging environment for those looking to purchase their first home.

According to the Permanent TSB/Economic and Social Research Institute house price index, in the 10 months to October, prices for first-time buyers fell by about 10 per cent, down to €234,648 from €260,786 last December.

However, evidence on the ground suggests that price drops are actually more significant than official statistics show. In 2007, Menolly Homes put properties at its Dunboyne Castle development in Co Meath on the market starting at €285,000 for a one-bedroom apartment.

By March 2008, the price had dropped back to €210,000, while myhome.ie is currently advertising the same property for €170,000 - a drop of about 40 per cent, or €115,000.

While people who bought properties in the past few years now fear slipping into negative equity as a result of such price drops - where the value of their house is less than the amount they owe the bank - for first-time buyers, plunging prices should mean that properties they previously were unable to consider should now be more affordable - but are they?

With banks adopting far more conservative lending policies, the loan-to-values (LTVs) and income multiples - sometimes as much as six or seven times' annual salary - offered during the heady days of the property boom are a thing of the past. Thus, while property prices have come down, first-time buyers are finding it more difficult to borrow.

Synonymous with the housing boom were 100 per cent mortgages. Banks offered such mortgages just to professionals, ostensibly - but in reality a much wider audience availed of the offer in order not to have to come up with a deposit.

As a result, many who purchased on the back of such a mortgage now find themselves in negative equity. Most of the mortgage providers on the Irish market who previously offered such products, including Ulster Bank, Halifax and Permanent TSB, have withdrawn them entirely. Any players still in the market will only entertain professionals with significant income.

Overall, today's LTVs, or the amount of the purchase price lenders are willing to advance, are far more conservative and often come with restrictions, although some banks, such as AIB, have remained consistent in their approach.

Elsewhere, things have changed.

Halifax now only offers first-time buyers a mortgage of up to 90 per cent, while it is only willing to advance 80 per cent on apartments; Ulster Bank is offering up to 92 per cent, and Permanent TSB up to 90 per cent. First Active does offer up to 95 per cent, but its first-time buyer package does not apply to the purchase of one-bed apartments.

Last month KBC Homeloans (formerly IIB Bank) said that it would only lend 80 per cent of the value of homes across the board.

Income multiples have also become a lot more strict. Previously, lenders were willing to offer mortgages on a case-by-case basis of up to six or seven times people's incomes; now they have pulled back to their standard criteria of about 3.5 to 4.5 times salary.

Moreover, Frank Conway, a director at Irish Mortgage Corporation, notes that lenders have become much more conservative in their approach to the actual income of borrowers that they are prepared to consider.

"Lenders are looking at base salaries and are far less likely to consider 100 per cent of overtime or bonus income," he says.

"Most lenders now view non-base income with concern that companies may slash those extra wage costs as an alternative to redundancies (or a last line of defence against layoffs)."

These new tougher lending requirements mean that despite the fact that house prices are now much cheaper, affordability has declined. While in real terms, a one-bed apartment at Dunboyne Castle cost €115,000 more this time last year than it does today, in terms of immediate affordability some buyers will perceive that it has actually become more expensive.

For example, on a 95 per cent mortgage, first-time buyers previously only needed a deposit of €14,250 on a purchase price of €285,000.

Now however, despite the property losing over a third of its value, for some buyers it has actually become less affordable because they will need to find €34,000 in savings for a deposit if they are only offered an 80 per cent mortgage.

This decline in affordability also indicates that prices still look overvalued.

For example, if a purchaser with an 80 per cent mortgage offer from a bank was looking to buy a two-bed apartment at the Garden House development in Drumcondra, Dublin 3 (see panel), they would need a deposit of €79,000 to fund the purchase - a sum most first-time buyers would find extremely difficult to come up with and which may prevent the properties being sold at that price.

Another change noted by Conway is with regards to the approval in principle (AIP) period. Previously, lenders were willing to grant an approval for a particular-sized loan over six to 12 months, but Conway says this has now been cut back to about one month.

Moreover, some first-time buyers used to avail of interest-only loans over a one- to three-year period.

Now most lenders have reduced the term which they are prepared to offer interest-only mortgages for, preferring instead to get their capital repaid as quickly as possible. Lenders are also not now likely to offer any "roll-over" facility to consumers when they reach the end of the interest-only period, notes Conway.

However, despite the tougher lending environment, first-time buyers can still benefit from declining interest rates, increased mortgage interest relief and falling house prices.

Over the past two months, the European Central Bank has slashed interest rates by 1.75 percentage points to 2.5 per cent and further rate reductions are expected soon, thus bringing down the monthly cost of servicing a mortgage.

In addition, from January 2009, first-time buyers will benefit from a higher rate in mortgage interest relief, as the rate will increase from 20 per cent to 25 per cent for the first two years of the mortgage, and to 22.5 per cent for the following three years.

First-time buyers no longer have to pay stamp duty, and the slump in the property market also means that legal fees have become more competitive.

Traditionally, solicitors would charge about 1 per cent for conveyance services but, in the current environment, house buyers can bring this fee down to less than 0.5 per cent, or can look for a firm which offers a flat rate.

For example, Robert Sweeney Solicitors in Dublin offer a flat fee of €816.75, including VAT, for first-time buyers.

A more competitive environment means that banks have started to beef up their packages on offer in an effort to drum up interest among first-time buyers and encourage them to purchase.

AIB recently introduced a one year fixed rate of 3.25 per cent to first-time buyers, after which it will revert to the standard variable rate, which is currently 4.5 per cent, while Halifax has also updated its offering, undercutting AIB's rate by offering a rate of 3.2 per cent, fixed until May 31st, 2011, for first-time buyers.

The deal is part of the bank's new €100 million mortgage fund and the rate will apply to all mortgages until the entire fund has been allocated.

The affordable housing scheme is also an option for first-time buyers, although with prices continuing to fall, buying in the open market may be more attractive.

Alternatively, first-time buyers can avail of the Home Choice Loan, introduced in this year's Budget, which aims to make it easier for new purchasers to get a mortgage by making loans available through local authorities.

Unlike the affordable housing scheme, where houses were offered at a reduced price, approved applicants in this scheme can purchase where they like.

It enables first-time buyers to borrow up to 92 per cent of the market value of a new home for up to a 30-year term, while the maximum loan amount will be €285,000.

Applicants must have a minimum income of €40,000.

However, purchasers should be aware that the scheme has been criticised for being too much like subprime lending - in order to qualify for the Government's loan, you have to have been knocked back for a similar loan by two commercial banks, while you can borrow up to five times your salary.

New affordability: The cost of purchasing today

The Garden House, Waterfall Avenue, Dublin 3.

Details: Two-bed apartment.

Cost: €395,000.

Stamp duty: Zero.

Deposit needed: Between €19,750 and €79,000.

Monthly repayment: €1,682.43.

Average salary needed to fund purchase: *Now: €88,875.

**Then: €59,250

Dunboyne Castle, Dunboyne, Co. Meath.

Details: Four-bed det with garage.

Cost: €475,000.

Stamp duty: Zero.

Deposit needed: Between €23,750 and €95,000.

Monthly repayment: €2,023.17.

Average salary needed to fund purchase: *Now: €106,875. **Then: €71,250.

Mount Oval Village, Rochestown, Co Cork.

Details: Two-bed townhouse.

Cost: €280,000.

Stamp duty: Zero.

Deposit needed: Between €14,000 and €56,000.

Monthly repayment: €1,192.61.

Average salary needed to fund purchase: *Now: €63,000. **Then: €42,000.

Source: myhome.ie

Deposits: based on LTV of between 80-95 per cent.

Monthly repayments: based on a 90 per cent loan over 35 years at an interest rate of 4.5 per cent.

*90 per cent loan based on four times salary.

**90 per cent loan based on six times salary.