Tighter criteria for 100% mortgage seekers

Certain job categories and minimum salary levels are required, writes Laura Slattery

Desperate first-time buyers doing the rounds of mortgage helpdesks, brokers' offices and property websites will probably respond to the offer of a 100 per cent, no deposit necessary loan by searching for their pen and asking "where do I sign".

But not every would-be first-time borrower can get a 100 per cent mortgage, and some of the lenders that followed First Active's move into the market in the summer of 2005 have actually tightened up the conditions under which they will offer them.

Bank of Ireland, which is currently advertising 100 per cent mortgages on massive billboards as "a cool way to your first home", has changed its lending criteria so that only single applicants with salaries of at least €45,000 and joint applicants with salaries of at least €80,000 between them can qualify.

EBS Building Society, meanwhile, has decided that only certain categories of professionals and public sector workers can dispense with the tedium of saving for a deposit.

Everyone else will get a mortgage worth a maximum of 95 per cent of the property price.

Although they might seem like a way to glean more cash out of stingy lenders, 100 per cent mortgages were never designed to help people get approval for bigger loans.

By eliminating the need for the traditional 8 per cent deposit, they simply help buyers get on the property ladder more quickly.

After all, 8 per cent of €280,000 - the average house price paid by first-time buyers - is €22,400.

That kind of lump sum isn't easy for young workers to amass without seriously crimping their lifestyles and testing their patience.

Many diligent savers will have simply watched house prices spiral beyond their reach as they attempted to hit their target.

For this reason most mortgage applicants, if they can get 100 per cent finance, will take it, according to Michael Dowling, president of the Independent Mortgage Advisers Federation (Imaf).

"That being said, house prices are stabilising, at least in the second-hand market," he adds.

This means deposit savers now have less need to worry about their dream starter homes escalating in value while they scrimp together that final few grand.

Amid accusations of irresponsible lending, the first financial institutions to offer 100 per cent loans were at pains to point out that their lending criteria for the loans were a lot stricter than for normal 92 per cent loans.

First Active and Ulster Bank, which are both owned by the Royal Bank of Scotland group, originally restricted the length of the terms on 100 per cent loans to 30 years instead of their normal maximum term of 40 years.

This meant that 100 per cent applicants wouldn't be approved for as high a sum as they would be under a normal mortgage, because they wouldn't be able to spread the repayments out over as long a period.

But both lenders now offer 100 per cent loans over 40 years, as does one of its competitors, Halifax.

The other 100 per cent lenders, Permanent TSB, Bank of Ireland and its subsidiary ICS Building Society, offer terms of up to 35 years.

But apart from the Royal Bank of Scotland group's change of heart on maximum term lengths (most borrowers over 25 won't qualify for a 40-year term), lenders haven't strayed from their more conservative approach to 100 per cent lending.

"The criteria have been pretty rigidly stuck to since they came in," says Dowling. "With other products, there is some flexibility if you don't tick all the boxes, but you have to tick the boxes for 100 per cent finance."

Some of the conditions on 100 per cent loans relate to the property itself, which usually must exceed a certain value, have two bedrooms or more and cannot be self-built. But most of the restrictions relate to the type of borrowers' income.

All of the lenders require a three-year record of continuous permanent employment, with the exception of Bank of Ireland, and also Halifax. The latter bank says applicants must be employed for a minimum of two years and not on probation. Halifax adds that it will also accept workers on long-term contracts where contracts are "a feature of the business sector they are contracting in".

Crucially, on mortgages of less than 100 per cent of the property value, lenders will take into account more than just the applicant's regular pensionable salary when it comes to assessing their income and how much they can afford to repay - not so with 100 per cent loans, according to Dowling. "There is very little flexibility, if any at all, on bonuses and overtime, unless they are absolutely guaranteed."

This means that most borrowers will be approved for higher mortgages if they can stump up a deposit themselves.

But for the permanently deposit-deprived, the recent moves by EBS and Bank of Ireland make 100 per cent mortgages that bit more elusive.

"If you look at the Bank of Ireland criteria, the income levels are quite high. A single applicant needs a minimum of €45,000 unless they're in the professionals and deemed civil servants category, and €45,000 is quite a hefty salary by any standard," he says. "Again, €80,000 for joint applicants is quite substantial. The reality is that it excludes a fair number of first-time buyers."

Doctors, barristers, solicitors, accountants, actuaries, dentists, vets, opticians, barristers and teachers are among the professionals who will be given special treatment by lenders, who will take into account their future earnings capacity and/or guaranteed employment.

"Personally I don't think there is any difference between a qualified accountant and an electrician," says Dowling, who believes the "professionals and civil servants only" approach is old-fashioned.

"An electrician will often be earning more than an accountant, and, unlike the accountant, will have great opportunities to earn regular nixers. But any profession where you are using your hands is discriminated against, which is archaic if you ask me."

In general, first-time buyers will have a wider range of options if they settle for 95 per cent finance, according to Dowling, with both EBS and IIB Home-loans willing to offer loans up to this value without attaching extra conditions.

A 5 per cent deposit on the average property price paid by a first-time buyer is still €14,000, but for Special Savings Incentive Account (SSIA) holders or couples with two incomes, it is a more manageable sum than the traditional 8 per cent deposit.

According to EBS, most applicants have some cash to put toward their property anyway.

For the 20 per cent of first-time buyers who do successfully manage to draw down a 100 per cent mortgage, what are the risks?

Although 100 per cent loans won't be any bigger in value - and indeed will actually probably be smaller - than old-style 92 per cent loans, they do leave borrowers more exposed in a housing market where prices are falling.

It won't take too much of a correction in house prices to leave the person mired in negative equity - a precarious financial position where they owe more than the value of the asset they own.

This could prove tricky, and financially bruising, if they need to sell and move house .

But borrowers who do provide a deposit may not be any better off. Recent research by mortgage insurers Genworth Financial found that 30 per cent of those who do have a deposit use unsecured borrowing from banks, building societies and credit unions.

First-time buyers have always been all too willing to take a giant leap on to the property ladder, even if it means straining themselves in the process.

"They just want to get their property," says Dowling. "They're not looking at how much the house will be worth in 12 months' time."