A very different market

The latest report on mortgage drawdowns from Banking & Payments Federation Ireland (BPFI) brings some encouraging news. The report shows that 6,803 new mortgages valued at €1.29 billion were drawn down by borrowers in Ireland during the second quarter of 2016.

The encouraging part of those figures is the fact they represent an increase of almost 30 per cent in volume and just under 29 per cent in value when compared with the first quarter of 2016. Furthermore, they represent an increase of more than 11 per cent in volume and just under 18 per cent in value on the corresponding second quarter of 2015.

In terms of the breakdown of borrowers, first-time buyers made up the single largest segment by volume at more than 48 per cent as well as 47 per cent by value. The next largest group was made up of mover-purchasers – either trading up or trading down – who accounted for just over 31 per cent of all mortgages drawn down and almost 39 per cent by value during the quarter.

The volume and the value of re-mortgage and switcher loans also continued to increase, but from very low levels. There were 493 of these loans valued at €108 million during the quarter. This reflected increases of 75.4 per cent in volume and 62.3 per cent in value.

More good news came from the BPFI’s latest mortgage approvals report. The report shows that a total of 3,274 mortgages were approved per month, on average, in the three months ending July 31st – some 1,593 (almost 49 per cent ) were for first-time buyers while mover-purchasers accounted for 1,061 (32.4 per cent). This represented a year-on-year increase of 17.6 per cent.

The increase in the value of mortgages approved was even higher at 28.5 per cent. The monthly average for the period was €659 million – of which € 306 million (46.4 per cent) was accounted for by first-time buyers and €260 million (39.5 per cent) by mover-purchasers.

There is also strong competition among the lenders, with the various players fighting for market share. Ulster Bank has been the biggest mover in this respect with its share market increasing to 19 per cent from 14 per cent in the first half of the year. According to figures produced by Davy, AIB remains the country’s largest mortgage lender with a 34 per cent share, followed by Bank of Ireland on 26 per cent, KBC on 12 per cent, and Permanent TSB on 9 per cent.

While all this might appear to paint quite a rosy picture, this is far from the case as the Central Bank rules have had a dampening effect on borrowing. These rules place a maximum loan to value (LTV) of 80 per cent on mortgages, requiring borrowers to save 20 per cent of the value of the home they wish to buy.

First-time buyers have it slightly easier. The LTV for them is 90 per cent for homes valued at €220,000 or less. For first-time buyers of properties over €220,000, the 90 per cent limit applies on the first €220,000 value of the property and the 80 per cent limit kicks in on the excess.

That means if a first-time buyer wishes to buy a home valued at €300,000, they need to have at least €38,000 in savings.

In addition, the would-be buyer can only borrow a maximum of 3.5 times gross income. That means that a first-time buyer couple would need a joint income of at least €75,000 before they could borrow the €262,000 required in this example.

“When I first looked at it I thought that the rules would mean that people wouldn’t be able to raise the deposit,” says David Browne, head of new homes with Savills estate agents. “That has been a factor but the salary multiple has been an even bigger factor. We are seeing people going back to live with their parents because they can’t borrow enough at the moment. There is a lot of talk about a new renting culture but I don’t see it. The main interest in the long term is to purchase. As long as the multiple is in place we will see people moving further out of Dublin to own a home rather than rent in the city. This has a cost for society in terms of commuting and so on.”

The elephant in the room in this case is the cash buyer. While 6,803 mortgages were drawn down in the second quarter of 2016, the number of transactions was 11,307 – indicating that that 40 per cent of the market was accounted for by cash buyers. With only 60 per cent of house purchases accounted for by mortgages, it is clear the market has some way to go before anyone can call it normal.

“We mostly deal with first-time buyers and last year was a bit of a disaster for them,” says Karl Deeter of Irish Mortgage Brokers. “The banks didn’t know how to report under the new Central Bank rules and they actually underlent as a result. This locked a lot of people out of buying into long-term wealth. Property is the biggest wealth creator in the world bar none and home ownership is particularly important for those dependent on the State pension. The State pension is not designed for rental. They are turning a housing crisis into a pensions crisis.”

Sherry FitzGerald economist Marian Finnegan also sees the Central Bank rules having a negative effect. “They have led to a very dysfunctional mortgage market,” she says. “Wanting to buy is one thing, ability to buy is another. If you look at what’s selling, we are selling more expensive properties while starter homes are not selling as well as they should be. Overall, 48 per cent of the market was cash sales in the first quarter of the year. This is exceptionally high and there were a lot of unexplained purchasers in that. Somebody else is actually paying – maybe it’s the bank of mom and dad.”

The very high proportion of cash purchases, partly explained by the presence of real estate investment trusts (REITs) and large-scale property specialists such as Kennedy Wilson in the market, means that there is still a cohort of buyer in the market which is managing to purchase properties without borrowing – or at least not from the banks. Value is in the eye of the beholder When it comes to deciding which mortgage represents the best value for you, a number of factors have to be taken into consideration. The first is the headline rate and level of monthly repayments involved. If you’re at the pin of your collar affording the mortgage repayments, you will probably do everything you can to minimise the monthly outgoings.

One way of doing this is by extending the term of the mortgage. Taking the best-value variable rate out there for first-time buyers – the 3.1 per cent on offer from Ulster Bank – this works out at €1,150.63 per month over 25 years for a €240,000 mortgage on a home valued at €300,000. Stretching it to 30 years would lower it to €1,024.84 per month. Not to be sniffed at when money is tight.

However, over the lifetime of the mortgage, repayments on the 30-year product total €368,942.40 while those for the 25-year version come in at €345,189.00. What you gain in the short term you pay for in the long run to the tune of almost €24,000.

However, the option is always open to switch to a shorter term, or even a different provider, after you are over the tough earlier years.

There are also some excellent fixed-rate products at the moment. Ulster Bank again comes in lowest with its 2.99 per cent three-year product. In this instance, the monthly repayments for the 30-year term would come in at €1,010.56 a month while the 25-year version would cost €1,136.86 a month. A very good deal indeed and with variable rates at rock bottom, it’s hard to see how it can be beaten.

There are even better deals available for those in the happy position of being able to borrow less than 60 per cent of the value of the home and it is best to shop around either by using a broker or contacting the institutions directly to see which ones are best for you.

In the final analysis, however, everyone’s definition of value differs. Some will seek to minimise the overall cost over the entire term of the mortgage while others will have much more short-term goals in mind. The best strategy is to decide what your goal is and then do the research to see which bank has the offer which best meets it.