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What every first-time buyer needs to know before putting in a bid

‘First-time buyers used to be mid-20s, not long out of college. But they’re much older now'

They are aged about 34, earning about €69,000 if they live outside of Dublin, and €81,000 in the capital, and looking to buy a new home in Dublin 15, Dublin 24, Kildare or Cork. They’ve saved a deposit of €37,000 for their home outside of Dublin, or €52,000 if they are buying in the city, although this can be reduced thanks to Help To Buy.

This is today's first-time buyer, and they're driving growth in the Irish property market. According to Dermot O'Leary, economist with Goodbody Stockbrokers, 71 per cent of the growth in mortgages last year was down to first-time buyers. "They're the key driver of growth in the overall mortgage market."

Getting a mortgage

It's the big one, but as financial adviser Michael Dowling tells his first-time buyer clients, "it's not easy to get a mortgage".

While banks are lending, prospective purchasers need to have a clear understanding of what they are looking for – and what they don’t like to see. Many first-time buyers will need to put in a lot of groundwork before they make an actual application.

Mortgage rules now determine that first-time buyers can only borrow 3.5 times their income – as applies to all borrowers – and up to 90 per cent of the purchase price of a property.

While Dowling says most people are now aware of these parameters, where their applications can fall down is when it comes to stress tests.

“Applicants have to show they can afford the mortgage when it is stress tested at two percentage points above the actual rate,” he says.

This means that applicants at the moment will need to show that they have the capacity in their income to be able to afford the larger monthly mortgage payments that would apply if interest rates were of the order of about 5 per cent to 5.5 per cent. So if you basing your application on your ability to pay a mortgage rate of about 3 per cent you could be in for an unfortunate surprise.

Dowling says the stress test rules are fair in the sense that they offer a “cushion” for borrowers if and when rates rise, but they may be less justified for those looking to lock into longer-term fixed rates.

“If you’re going for a five- or 10-year fixed rate then it’s a little bit unfair if you’re being tested at such a high rate when you’ve locked in your repayments.”

But while stress tests can hit borrowers, the good news is that “it can be fixed” even if you fall down on the stress test first time around, says Dowling, noting that most people will be able to pass the stress test within six months or so by spending less during that period. “For most it’s about saving a little bit more,” he says.

If you opt for a doer-upper you might find that your bank will be willing to lend not just the purchase price, but also to fund the cost of renovations

First-time buyers should also expect their current accounts to come under the microscope as part of the process. Issues like taking cash out with your credit card or having referral fees can be of concern.

“I can absolutely assure you that every transaction over the six-month period [ahead of your mortgage application] is looked at,” warns Dowling.

Gambling is another red flag. “Even €20 a week – the bank will always ask questions,” says Dowling.

If you opt for a doer-upper you might find that your bank will be willing to lend not just the purchase price, but also to fund the cost of renovations. But again it will depend on your income. The bank will want to ensure your total borrowings, as a proportion of the market value of the property once the refurb is completed, doesn’t exceed 90 per cent.

As Dowling explains, this means that if you’re buying a home worth €200,000 the bank might lend you 90 per cent of this, i.e. €180,000. It could then, depending on your income, offer you 90 per cent of €50,000 in refurbishment costs. This would bring total borrowings to €225,000 – but the caveat is that the property should be worth at least €250,000 once the work is finished.

The exemptions

Of course the 3.5 times income rule won't apply to everyone; it is possible to borrow up to five times income by obtaining an exemption to the limits. Under Central Bank rules, banks are allowed exempt up to one in five first-time buyers from the 3.5 times rule, while one in 20 first-time buyer applicants can borrow above the threshold of 90 per cent of the purchase price of the property.

These exemptions ran out very quickly last year – in some cases as early as April – so “there’s been a big rush for borrowers looking for exemptions this year”, says Dowling.

The system still has issues. David Browne, head of new homes with Savills, says that one applicant can have more than one exemption under mortgage offers from a number of different banks, thus blocking an exemption for everyone else.

And you’ll also need a higher salary to qualify for an exemption, with Dowling citing at least an income of €60,000 for a single applicant and €80,000 for a couple to qualify.

“Those on lower incomes have far greater difficulty getting an exemption,” says Dowling, adding that “it’s not fair” but it’s the way the system is working.

Bank of mum and dad

Figures from the Banking and Payments Federation of Ireland show that the average deposit for a first-time buyer outside of Dublin is €37,000 – or €52,000 in Dublin. And while Help To Buy can help reduce this, experts say that most borrowers are completing a deal thanks to help from the bank of mum and dad.

First-time buyers used to be mid-20s, not long out of college, but they're much older now as they need time to save

“I’d safely say that 70 per cent of first-time buyers have a gift of some description from their parents,” says Dowling, noting that he has seen some first-time buyers come in with a gift of as much as €300,000.

Browne agrees, noting that in the €400,000–€500,000 purchase price range, “we’re seeing a lot of mums and dads help with the deposit”.

Finding a home

The challenge in affordability means that a “significant proportion” of the Irish population won’t be able to get on the Irish housing ladder, says O’Leary, pointing to the impact of the Central Bank rules, as well as the cost of delivery point, which O’Leary puts at about €275,000 in the capital. Those that do will typically be older.

“First-time buyers used to be mid-20s, not long out of college, but they’re much older now as they need time to save,” says Browne, adding that a lot are now in their mid to late 30s.

The introduction of Help To Buy and an overall rise in development means they at least have more choice now than they would have had in the recent past, and bidding isn’t as frenzied.

“The market is levelling out. It’s now much more stable, and people are taking longer to decide what they want,” says Browne, noting that first-time buyers have “more choice”.

While first-time buyers are also looking at second-hand homes they can be put off by the high costs of bringing them up to modern standards. “They are much more tuned into the environment,” says Browne, noting the appeal of an A-rated house.

And first-time buyers largely have the new home market – at least up to a certain price point – to themselves at the moment.

Investors are “kind of non-existent in my market at the moment”, says Browne, though he adds that where the market is “completely out of kilter” is in apartment sales, with first-time buyers unable to buy apartments in the city centre or nearby suburbs because of the strength of the build-to-rent market funded by institutional investors..

“We’re missing a big part of the jigsaw,” he says.

On where prices might go, O’Leary says price growth in the first-time buyer market could be of the order of about 5 per cent this year, with Browne pointing to between 3 per cent and 5 per cent.

Discount mortgages

In addition to Help To Buy, homeowners can also avail of a Rebuilding Ireland home loan which allows you to borrow up to 90 per cent of the purchase price of a property at a discount rate through your local county council.

The discount mortgage rate – a 25-year fixed available at 2 per cent for example – means that homeowners will typically qualify for more through this product than they would through their bank. The purchase price of an eligible property is capped at €320,000 in Cork, Dublin, Galway, Kildare, Louth, Meath and Wicklow, and at €250,000 in the rest of the State.

If you can qualify Dowling says you should “absolutely” take this product rather than one from a bank, noting that the interest rate on offer is “superb” and it means you will be able to borrow more than you otherwise would.

However, while it looks good on paper the attractiveness of the scheme has been hindered by the requirement to take out accident and mortgage repayment insurance, which can cost between €100 and €130 a month, and makes it too difficult for some otherwise suitable applicants to apply.

There are also restrictions. You cannot earn more than €50,000 as a single applicant or €75,000 as a couple, and you must have been rejected – or received only offers of insufficient funding – by two lenders to qualify.

Moreover, some councils – such as Fingal – have stopped accepting applications for the scheme.

Help To Buy

Introduced back in January 2017, the Help To Buy (HTB) initiative gives first-time buyers a 5 per cent discount on the cost of a new home in the form of a rebate of income tax paid. It only applies to new properties valued at up to €500,000 – and to a maximum of rebate of €20,000 – and to avail of the initiative you must live in the home for five years.

The rebate works by reducing the amount you owe, so if you wish to put a 10 per cent deposit on a house worth €300,000 you’ll only have to stump up €15,000 yourself.

But the scheme is now due to come to an end at the end of this year, with Minister for Finance Paschal Donohoe expected to make an announcement on the scheme in October's budget, if not before. The jury is out on its effectiveness.

Some, such as Dowling, question the upper limit, and wonder whether it should be tweaked if extended.

“If you’re buying a house for €500,000 you don’t need assistance to buy that house,” he says, adding, “it should have been targeted where the real need is – anything up to €350,000 or maybe up to €400,000”.

Others worry that the rebate has just encouraged builders to pitch new home prices higher to a captive market.

But still others want to see the incentive extended as is. “Demand weakens without Help To Buy,” says Browne, adding that this could impact on developers’ plans. The uncertainty as to whether it’s going to be extended or not is “unhelpful”.

“We’d be in a much worse place if we didn’t have that HTB scheme in place.”

For now, if you do want to avail of it remember that you must do so before year-end, although there is some leeway. According to a Revenue spokesman, where an application is made between October 1st and December 31st, 2019, you won’t actually have to make your claim until March 31st, 2020.

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