Not so long ago, a reader had a query as to whether or not there was “any hope” for them to buy a house. Single, and earning about €37,000 a year in a public-sector job, the reader despaired of being able to save enough money for a mortgage.
It's not an unusual situation and it's one that's becoming increasingly common given the upward trajectory of rents; our reader is likely paying a significant amount in rent but, despite the fact that they may end up paying far less if they could secure a home, they will find it "almost impossible", according to financial adviser Michael Dowling, to qualify for one.
“Any single borrower is always at a disadvantage because it’s one income as opposed to two,” he says. And this is compounded by the fact that we’re a “long, long way away” from building affordable properties for single buyers on average incomes.
As we will see, a Rebuilding Ireland home loan may be the best option on a second-hand home, with traditional banks just lending too little for a purchase in the capital. The challenge, however, will be getting the deposit; while the help-to-buy scheme in theory can help, there are no simply no new homes being built in our applicant’s price range.
Qualifying for a mortgage
The first step is to see how much our putative home buyer would get in a mortgage, and working back from there, assess what kind of a property they could afford, and subsequently how much of a deposit they would need to save.
And the first step is not a very positive one.
"Incomes around the average industrial wage are always difficult to fulfil the criteria," says Dowling. Indeed, he ran an income of €37,000 for a single person through all the banks' calculators and all he could come up with the amount they could borrow was bang smack in line with the Central Bank rules, of 3.5 times income.
This would give a total mortgage of just €129,500, or a purchase price of about €143,333. While this would mean monthly repayments of about €530 a month, and would thus be affordable based on our would-be buyer’s net income of about €2,500 a month, it’s still unlikely to get our buyer very far in Dublin.
“If the loan amount is €129,500 then they’d need an exceptional deposit built up, or to get a gift, to buy in a Dublin context,” Dowling says.
It’s also important to remember that to qualify for just this amount, our applicant would also need to carry no further additional debt; a car loan or holiday loan would make that figure shrink even more.
What about an exemption?
Central Bank rules allow for exemptions to the 3.5 times income limit. About 20 per cent of first-time buyers, for example, are entitled to borrow more than this, with Dowling noting that he succeeded in securing a mortgage of as much as 4.75 times income for one applicant.
However, this won’t apply to our reader.
“When you go looking for an exemption from any of the banks they up the bar in terms of net disposable income or minimum disposable income you have to have available,” Dowling says. And, given the banks like to see a 25 per cent bump in net disposable income for those qualifying for exemptions, this rules out those on lower to middle incomes.
“If you want to get an exemption, you’ll be fine if you’re earning €80,000,” he says, but notes that even though it looks like our single average earner could afford more in repayments, banks would be unwilling to lend them more.
“Even though people on lower incomes are typically better savers and they manage their money better than people on higher incomes,” he says.
In the aforementioned example, a loan of €129,500 would equate to monthly repayments of €530 over 30 years based on an interest rate of 2.85 per cent. Given that our would-be buyer has net income of about €2,500, this works out at just 20 per cent of monthly earnings.
“And that’s not an uncomfortable position to be in,” he says, noting that people really shouldn’t be paying any more than 35 per cent of their net income on their mortgage repayments.
This means that our average earner could reasonably expect to be able to afford to borrow a greater amount – but as Dowling notes, the rule of thumb he typically applies for an exemption is a minimum income for a single person of about €60,000.
Another way a low-income buyer might be disadvantaged is the cash-back schemes now offered by the banks. While they do end up costing you more over the long term, they can offer some much-needed funds when you need it most as you move into your new home. On a €129,500 loan our applicant could get back about €2,600 – but as they can’t really borrow from a bank this won’t help.
But, before our reader loses all hope, they should first consider a Rebuilding Ireland home loan scheme. While the evidence suggests that this scheme’s coffers have been all but exhausted, the Government says it’s still accepting applications. Opting for this scheme, which offers low-cost loans over 25 or 30 years for single earners on €50,000 or less, or €75,000 for a couple, could allow our applicant to borrow more, as the underwriting process is based on affordability, rather than Central Bank lending rules.
As Dowling notes, he has seen some applicants borrow as much as five times their income through this scheme. But they must tread carefully to ensure that they get the most out of the scheme.
If, for example, they opt to borrow at the variable rate of 2.3 per cent over 30 years, then they’ll only be able to borrow up to €147,693 (purchase price of €164,103), although their monthly repayments will be just €568.
If, however, they opt to borrow at 2.25 per cent fixed over 30 years, our putative home owner could then borrow €186,513 (purchase price of €207,236), for monthly repayments of €713.
The reason for the difference is that the latter option is a cheaper rate of funding, with the Government passing on this to the buyer in the form of allowing them to borrow more.
Such a mortgage would be more than enough to buy a home in most parts of the country, with the possible exception of Dublin.
Even in Dublin, our would-be buyer shouldn’t lose all hope. According to MyHome.ie, which is owned by The Irish Times, there are 325 properties available for sale for €200,000 or less in Dublin, almost 200 of which have two or more bedrooms. Available properties include a one-bed in Beaumont, a two-bed in Carpenterstown, Dublin 15, and a two-bed in Ballyfermot, Dublin 10.
If our applicant has the possibility of a raise in the short term, this could help their situation even more. On a salary of €40,000, Rebuilding Ireland would lend them up to €200,235, which would allow them buy a home for about €222,483.
According to MyHome.ie, there are currently 522 properties for sale in Dublin for €225,000 or less, including three-beds in Tallaght or Balbriggan.
Monthly repayments on a mortgage of €200,235 would be €765. And with a three-bed, our applicant could rent at least one of the rooms – tax free under the rent-a-room scheme – which would cut their repayments substantially.
Again, securing such a property is assuming the applicant has no other debt. It also depends on our buyer getting a reasonable quote for mortgage protection – the loan requires the borrower to take out mortgage protection through the council which can cost as much as €133 a month and reduces their capacity to repay their loan and thus the amount they can borrow.
“If they have other debt, they’ll have a problem as it will reduce what they can afford to pay,” says Dowling.
In the aforementioned example, if our applicant had a car loan of €250 a month, then this would slash what they could borrow to just €128,169.
The next challenge for our buyer is saving enough to fund a deposit. Based on a purchase price of €220,000, our buyer would need to get €22,000 together – a difficult task when you consider the level of rents in Dublin.
If our buyer is paying rent of €700 (and they could be paying as much as €1,500 for their own apartment), including utilities, then they will have disposable income of €1,808 left over. Finding sufficient money to save would be difficult therefore, but not impossible.
If they could manage to save €200 a month, after five years they would have saved €12,148, based on a return of just 0.5 per cent. If they took on some risk and invested in equities, and managed a return of 4 per cent a year, they could save €13,259 over this period, although taking on risk also means that their savings might be depleted.
Either way, even if they had savings of €5,000 or so already, they would still be short.
Help to buy
Due to come to a finish at the end of this year, the help-to-buy allows first-time buyers to get a 5 per cent rebate on taxes paid in previous years towards a down payment on a new home.
It means, for example, that someone buying a new home for €350,000 would only need to come up with €17,500 themselves, thanks to the 5 per cent Revenue rebate.
So, our buyer of a €220,000 home could slash the amount of a deposit they need to save from €22,000 to just €11,000 if they opted for a new home.
Again, lower-income earners are being disadvantaged – this time by a State incentive.
While there might be more than 500 Dublin properties available in the €220,000 price range in the second-hand market, there is just one new home development that would tick this box: Summerseat in Clonee, just over the county border from Dublin in Co Meath, where one-bed apartments are available for €215,000.
If our buyer opted for this, they’d need a deposit of just €10,750, and could afford to buy it with a Rebuilding Ireland home loan. But they couldn’t rent out an extra room – which can bring in up to €14,000 a year tax free – making the servicing the mortgage more difficult.
Even if you push the price up to €350,000 our choice of new homes rises to just 16 different properties – not enough to offer any real choice – and showing how dysfunctional the new homes market really is.
If we broaden our filter to new homes priced at between €400,000 and €2 million, however, we find 104 new developments with properties for sale in this price bracket.
So the help-to-buy scheme is doing very little to help people looking for a step on to the housing ladder at an affordable price.