Home FinanceChoosing the right home loan is just as important as settling on your dream abode, writes Una McCaffrey
As if you didn't have enough to think about at this frantic stage of your life. You're house hunting for God's sake - how are you meant to find the time to organise the most significant step of your financial career at the same time? Alas, the answer is all too simple. You should be taking as much time to find your mortgage as you are dedicating to the search for the home of your dreams.
It is a two-pronged process: just as you plan to live in one, you will find that you need to fit your life around the other for as long as you have it. And for many people these days, this could mean budgeting for mortgage repayments for a cool 40 years. It is thus reasonable to expect that the whole business should be given a bit of advance planning.
The good news is that this research does not need to be too difficult. In fact, a basic awareness of, say, three key aspects of the mortgage market will go a very long way.
First, it will make sense to have an idea of how mortgage interest rates work so that you can make a judgement on the type of mortgage that is best for you.
To do this, you need to know that Irish mortgage rates are set with reference to the decisions of the European Central Bank (ECB), whose governing council meets every month to set the main interest rate for all countries that use the euro. The simple rule is that if the ECB raises rates, Irish mortgages (apart from those on fixed rates) will get more expensive. Likewise, if the ECB's rates fall, Irish mortgages will get cheaper.
Late last year, the ECB raised interest rates for the first time in five years, prompting a rash of rate increases in the Republic. The ECB increase in question - a quarter of a percentage point - was very small, but it is likely to be followed by a further series of small increases throughout this year. If this happens, as most expect, it will mean that variable and tracker mortgages will become progressively more expensive as the months go on. The cost of fixed mortgages, which have been dearer than their sisters over the past few years, will remain steady.
It is perhaps no surprise, therefore, that these fixed products have been growing in popularity over the past few months, as an awareness of the ECB's likely intentions has seeped into the market.
Peter Bastable of mortgage broker Simply Mortgages says that while tracker mortgages (loans that guarantee to stay within a fixed margin of the ECB rate, whatever this might be) "stole the show" in 2005, there was a "definite shift" towards fixed loans near the end of the year. The reason, presumably, is that buyers believe that by locking into a particular rate for a few years, they can insulate themselves from the vagaries of the ECB's decision-making process.
Frank Conway of Irish Mortgage Corporation reports a similar trend, noting growth in three- and five-year fixes. He also reports solid demand for one-year fixes, products which can carry incentivised rates for new customers.
This brings us to the second key aspect of mortgages: the products on offer. In simple terms, the market breaks down into three parts. First, we have the aforementioned fixes, which make sense for those who are nervous about their monthly budget, or for those who believe that by fixing, they can save money when variable rates and trackers are shooting higher. Be aware though, the second strategy is essentially akin to outsmarting the banks, which naturally pitch fixes at a level which they believe will make them money.
Variable rates, as the name suggests, can move up and down when the lender decides they should do so. Tracker rates are essentially the same product, but they come with an additional guarantee whereby they will only change when the ECB moves its rates and, when this happens, they will stay within a fixed margin of euro-zone rates. All the lenders offer these now, with the main difference lying in the size of the margin.
The third thing and final basic point to understand is that you can decide on how long you want your mortgage to last. Longer-term mortgages will carry the cheapest monthly repayments but will cost most over the whole term of the loan. Over the past few years, average terms have been getting longer and longer . . . and longer. Mr Conway says many of his broker's customers are now taking on 30- to 35-year loans, with an increasing number of single-income applicants now applying for 40-year loans to help them to get over the approval line. Mr Bastable goes even further, reporting a "definite shift" to 35 years among his clients.
The thing to remember about these long-term loans is that not everybody will qualify for them. It is sad but true to note that if you are a first-time buyer aged 36, you will have trouble getting anything more than a 30-year term. The problem? You are too old. Lenders want you to have repaid your loan by the time you are 65, or at a very big push, 70. This means that if you really want to push the boat out and sign up to a 40-year mortgage, you can't afford to be a day over 30. And even then, you will be limiting yourself to just two lenders: Ulster Bank and First Active.
So, just for information's sake, what age is the typical first-time buyer these days? Well, definitive numbers will always be hard to find, but evidence suggests our 36 year-old is a bit over the hill on this front too. At Irish Mortgage Corporation, the average first-timer is 29.1 years, marking a slight decrease from a year or so ago when the average was slightly more than 29.5 years. Mr Conway notes, however, that house hunters tend to start their property search much earlier.
At Simply Mortgages, Mr Bastable says the average first-timer is aged in his or her mid-twenties. "Actually," he says, "I would say it is fairly static, if anything getting slightly older." Perhaps there is hope for our 36-year-old after all.
