Just who is getting the mortgages?

 

MORTGAGES: Despite the banks' PR guff to the contrary, securing a mortgage has become incredibly difficult these days

‘WE SAY ‘yes’ to 100 mortgage applicants daily,” proclaims Bank of Ireland in its current home loans advertising campaign. Well that’s a relief. And to think, we thought that the banks were effectively closed for business (despite the €7 billion of taxpayers’ money pumped into AIB and Bank of Ireland), when all the while this one benevolent institution has been making the dreams of 100 aspiring homeowners come true every single day.

Or has it? This wouldn’t be just another clever piece of spin to appease taxpayers, would it? And just what kind of hoops do people have to jump through to get a bank to give them the cash to buy a house?

Talk to any mortgage broker and it quickly becomes clear that Bank of Ireland’s slogan does not even come close to reflecting the reality of what’s happening on the ground. “This, in my view, is very much a cynical PR exercise by the banks to somehow curry favour with the public and the Government [and imply] that they’re lending money to any first-time buyer who wants to buy,” says Michael Dowling of the Independent Mortgage Advisers’ Federation. “The reality is that they’re very much cherry-picking customers they want, and if they have any excuse not to lend to someone, they will not lend.”

Bank of Ireland may very well be approving 100 mortgages every day, (which would equate to about 26,000 mortgages a year), but the implication that mortgages are flying out the door is misleading. This top-line statistic refers to the number of mortgages approved in principle (between February and September 2009), as opposed to those actually drawn down, which is a much more accurate gauge of the bank’s lending activity.

Bank of Ireland has refused to divulge the number of mortgages drawn down during this period to The Irish Times, claiming the information was “competitively sensitive”. However, it did confirm that almost €750 million of its €1 billion dedicated First-Time Buyers’ (FTB) fund launched last March has been drawn down.

This may seem like a huge sum but it’s not. The average FTB home loan is about €200,000 so it translates into just 3,750 mortgages since the fund was launched. This in turn works out at about 14 FTB mortgages drawn down per day.

Given that FTB mortgages account for more than 35 per cent of the overall mortgage market, we can extrapolate that a grand total of just 40 mortgages (including top-ups, remortgaging, mover-purchasers and investment mortgages) were actually extended by Bank of Ireland to borrowers per day over the last year.

In Dowling’s experience, out of 100 approvals in principle, only about 50 of those make it all the way through to loan completion stage. There are several reasons for this. Many people who have received mortgage approval in the last year or so have held off from buying a property in the expectation that prices will fall further.

Also, if an individual’s circumstances change between getting approval in principle (which is not legally binding, and is only valid for three months) and drawing down the mortgage – for example, their employment status changes – that approval could be withdrawn.

Another trend observed by brokers is that lenders – including BoI’s broker chain ICS Building Society – will approve a mortgage applicant for a significantly lower loan amount than they need to make a purchase. For example, an individual might apply for a mortgage of €280,000 to buy a house costing €320,000 but will only be approved for €240,000. This will be recorded as an approval by the bank, but from the customer’s perspective they have effectively been declined.

This “makes for great copy”, says Karl Deeter of Irish Mortgage Brokers, but the loan “isn’t going to go anywhere”.

The reality is that banks have a restricted amount of cash to extend in new mortgage business as they are trying to shore up their balance sheets, and therefore are picking only the crème de la crèmeof applicants by tightening up their criteria.

So who is the “dream candidate” these days? According to Dowling, there are two sets of dream applicants. Firstly, those in medical professions, such as doctors, consultants and dentists, ideally if they have permanent jobs in the State sector. Civil and public servants are also viewed favourably, despite the pension levy introduced last year, because they are deemed to have guaranteed employment.

Anyone who is not in full-time, permanent employment will quickly discover that they are persona non gratawith lenders at the moment. Not surprisingly, anyone whose job is related to the construction industry – from builders and tradespeople to architects, engineers, solicitors and estate agents – also is likely to find their applications rejected. Even employees of banks themselves will now find it difficult to get a mortgage, because of the number of redundancies expected to come down the tracks in this sector.

However, having a “job for life” (or as close to it as is possible these days) and a large income is no longer enough in itself. Prospective lenders now forensically examine bank statements for proof that the applicant is in the habit of regularly saving an amount roughly equivalent to what their mortgage repayment would be.

Lenders also look for “stress items” – such as referral fees for exceeding overdraft limits, or even large credit card bills being paid every month – which could “disbar” that person from getting a mortgage, Dowling says.

Interestingly, if it is evident from the person’s bank statement that the applicant gambles on a regular basis, this is counted as a monthly “loan repayment” when working out that person’s repayment capacity. Another potential hurdle to getting a mortgage is the fact that financial support from generous parents is no longer being taken into account.

Aspiring FTBs who are fortunate enough to receive a gift from their parents to cover their deposit (which must now be at least 8 per cent of the value of the property) find that lenders want proof that they have been able to save up an equivalent amount themselves. Furthermore, lenders are no longer taking rental payments into account when calculating whether an individual can afford a mortgage. In the past if the person was paying, say, €900 in rent each month, banks would take into account the fact that this amount would be freed up to pay their mortgage, but this is no longer the case.

“Lenders should be prudent in their lending but I do think they should take into consideration things they don’t such as rent, or a gift from parents,” says Rachel Doyle of PIBA.

When it comes to the strictness of their mortgage lending criteria, it seems that banks have gone from one extreme to another. Whether they have gone too far is open for debate, but one thing is for certain – regardless of what impression the banks are trying to create, getting a mortgage has become an incredibly difficult feat.