With the cooling of the property market, lenders are being more cautious about where they are putting their money, writes Laura Slattery.

Healthy resale value has long been the priority of first-time buyers who don't intend staying put in their starter home for the rest of their lives.

But with growth in house prices slowing down and fears of an oversupply of property in certain pockets of the country, lenders are also signalling that they intend being more choosy about the properties for which they will provide mortgage finance.

Amid concern that onebedroom and studio apartments could be the most vulnerable in the event of a further cooling in the market, First Active has decided not to offer its new 100 per cent, no-deposit-necessary mortgage to buyers of these properties.

And last week, the chief executive of rival lender IIB Homeloans, Tom Foley, indicated that lenders would be more discriminating in the current environment.

Over the 12 months to the end of May 2005, house prices grew by an average of just 6.6 per cent, compared with a growth rate of 11.5 per cent over the 12 months to the end of May 2004.

"It's hard to see where it is going. There is oversupply in some areas and certainly we would be cautious of funding properties in those areas," said Foley.

The caution arises from fears that while some properties will rise in value at more than the average rates, others could lag behind and even fall in value.

This could leave recent buyers with high borrowings stuck in negative equity, where they owe more than the market value of their homes and cannot sell up without realising a loss. This miserable prospect has rarely been considered by the current generation of eager Irish property hunters who have had the merits of owning their own property drummed into them with increasing ferocity over the past decade.

Lenders have always been careful of overexposing themselves to particular developments, according to Ronan Mackey, an adviser at NC Mortgage Brokers.

"Lenders won't want to be overly exposed to a certain area. For example, if there was a block of apartments and one lender took security on anything greater than a quarter or a third of the apartments, they would be exposed if the value of the apartments was to fall or if there was a problem selling them on."

Lenders' caution in relation to apartments will increase the further people move away from Dublin and other major cities, says Mackey.

"Generally people choose to live in apartments because they are cheaper but also because they are built in convenient areas. An apartment stuck out in Kinnegad, for example, might not retain its value."

According to Bank of Ireland's Irish Property Review, which was published earlier this week, the number of planning applications for apartments fell 23 per cent in the first quarter of 2005, a sharp reduction on the number made in the same period the previous year.

"This is most likely a knee-jerk reaction to falling rents evident in the rental market over the past two years," the bank said.

As a result, investors hoping to rely on a certain level of rental income to make their monthly mortgage repayments may be the first to face stricter lending criteria, as financial institutions look for stronger guarantees of their ability to repay.

But Olive Moran, marketing manager for Bank of Ireland Mortgages, says the lender does not have any specific policy on location. "As a matter of course, we would do a valuation and make a judgment on the market value of the property, but we don't have a listing of good areas and bad areas," she says.

First Active's decision to refuse 100 per cent mortgages to buyers of one-bed and studio apartments is likely to rule out the product for many first-time buyers. A significant proportion of the people attracted to the idea of full funding - ie those with no savings - are also likely to be on incomes too low to buy anything more spacious, especially in the Dublin area.

But the good news for first-time buyers is that lenders' wariness of certain areas or certain types of property tends to be limited to cases such as the 100 per cent mortgage, where the loan represents a high percentage of the current value of the property (otherwise known as loan-to-value or LTV).

"In such deals, the risk of negative equity is far greater than with a lower LTV," says mortgage broker Liam Ferguson of Ferguson & Associates, who has launched a new website for first-time buyers at www.yourfirstcastle.com.

"On a 30-year mortgage of 100 per cent, the capital is not going down very quickly in the early years," he explains.

"For example, a customer borrowing €250,000 over 30 years in order to buy a property also worth €250,000 at an interest rate of 3.25 per cent will still owe just under €245,000 after one year and just under €240,000 after two years."

It would take only a 5 per cent correction in property prices over the first two years to leave this person in negative equity, Ferguson says. According to Mackey, in rare cases lenders will lower the maximum percentage they are prepared to advance if they are not convinced that the property will hold its value.

"For example, someone might want to borrow €150,000 to buy an old farmhouse in the middle of nowhere that's falling down and needs a lot of refurbishment," says Mackey.

"If the lender thinks their security might be compromised, it will be reluctant to give the full 92 per cent, or the full 100 per cent, and only advance 75 per cent of the purchase price. It may say it will release the final 17 per cent once the buyer makes the refurbishments, meaning the borrower could end up having to fund that work up front."

This practice is confined to second-hand properties, Mackey says.

As far as new properties are concerned, he adds, lenders don't tend to give loan applicants approval in principle for a certain amount and then turn around post-valuation and withdraw it solely because they think the applicant's selected property is overpriced or overexposed to any future dips in prices.

But even if securing the mortgage finance is not a problem, first-time buyers will do well in the current market to choose their starter home with care.