Rate cuts offer hope but market still tough

Loan approval managers will be casting a far more critical eye over new mortgage applications, writes Simon CarswellFinance Correspondent

THERE HAS been a glimmer of hope in the mortgage market in recent weeks as four lenders have bucked a trend by cutting some of their fixed interest rates.

But the first-time buyer and buy-to-let investor sectors of the market are still under pressure due to lower demand, tighter lending rules and higher borrowing costs.

The global credit crisis and falling property values and rents at home have made every bank and building society extremely cautious on new lending.

While most lenders have declared themselves open for business, the truth is banks are much more restrictive than they were at the height of the property boom 18 months ago and want more cash from borrowers before approving new mortgages.

This is reflected in the new mortgage figures for the first half of the year pooled by the State's banks. The figures, which will be formally confirmed in the coming week, show that the re-mortgage or switching market was the only segment to have grown in value, rising 19 per cent. Switchers tend to have been paying off mortgages for several years. This is attractive for banks because, in a falling market, lower loan-to-value debt means lower risk.

All other sectors of the market declined in the first six months.

First-time mortgages were down 28 per cent, trading-up loans fell 26 per cent, buy-to-let mortgages declined 17 per cent and top-ups dropped 23 per cent.

The value of new mortgages fell 16 per cent in the first half of the year on last year. The last time the market saw activity like this was back in 2005. If this decline continues, the market will be down 20-25 per cent by year end.

There is no doubt that the decision by banks to tighten lending rules and raise mortgage rates, particularly since March, has contributed to the decline.

Affordability is an issue. A mystery shopping exercise by Davy stockbrokers earlier this month found that most lenders were no longer willing to increase their loan offer if there was a guarantee from a parent or a room was being rented out.

Davy analyst, Stephen Lyons, found that the average mortgage offered amounted to five times a single first-time buyer's salary or 5.3 times' the combined salary for a couple — this was down about 10 per cent since October 2007.

Austin Hughes, chief economist at IIB Bank, has pointed out that recent reports from the European Central Bank (ECB) and the Central Bank showed that the fall-off in borrowing has been due to weaker demand rather the credit crunch. It's no surprise that prospective buyers are delaying purchases if prices are to fall further, borrowing costs are largely not improving and consumer confidence is weaker.

Prices have fallen 12 per cent from a peak in February 2007 to June, according to the Permanent TSB/ESRI house price index, though many believe the decline has been higher and will fall further, perhaps as much as 40-45 per cent from the peak.

Recent moves by EBS Building Society, IIB Bank, Bank of Ireland and AIB to reduce some fixed rates will provide some relief to borrowers coming off old fixed rates or discounted rates.

However, the rate cuts on these products will be of little help to first-time borrowers who have, in the space of less than six months, been forced to come up with much larger cash deposits to get onto the property ladder.

On Monday, AIB sounded a positive note when it said mortgage approvals and draw-downs were up 15 per cent and 30 per cent respectively in the second quarter on the first three months of the year, though it admitted business was down on last year. The first three months of any year also tends to be quieter in the mortgage market.

A survey by the broker, the Irish Mortgage Corporation (IMC), showed that first-time buyers choosing to purchase in the first half of the year were still taking out high loan-to-value (LTVs) mortgages, as 100 per cent loans for first-timers started to become harder to secure in April.

More recent data on the rental market has shown that buy-to-let property investors have also been coming under some pressure.

The landlord sector held up well in the first three months of the year, but demand among buy-to-let investors, who account for a quarter of all outstanding mortgages, declined in the three months to the end of June.

A report from property website, Daft.ie, last week found that rents fell in the second quarter of the year for the first time since 2004. The prospect of short-term capital gains is also diminishing as values fall, so landlords are being hit with a double whammy.

A recent note to brokers from IIB Bank, a top five player in the buy-to-let market, has shown that the bank has become more cautious on lending to landlords in certain areas. It listed parts of Dublin and the rest of the country into "prime" and "secondary", restricting new lending on certain mortgages in the secondary areas.

All this means the property market is heading for a tough autumn and loan approval managers will be casting a far more critical eye over new mortgage applications.