In my 25 years in the mortgage market, I have never experienced such a dysfunctional mortgage market. We have five banks lending but their “hands are tied” by the new Central Bank rules on lending.
Let me give you a stark statistic. The mortgage market in Ireland will be € 4/€ 4.2 BN in 2015. Manchester and the Greater Manchester area alone will lend more money this year than Ireland.
We have the fastest growing economy in Europe, unemployment is falling, exports growing and our National Debt under better control but we are not providing enough homes for those who would like to buy and at the extreme end, homelessness is growing.
No market introduced two significant changes the way we did in February this year, namely a reduction in LTV and a reduction in LTI.
In the UK, facing similar problems to ours, they introduced a LTV reduction but left LTI at 4.5 times (it is 3.5 times) in Ireland.
It is important to recognise that prior to the amendments introduced, there were very rigid rules in place which remain in place following the additional new Central Bank guidelines.
1. All mortgage repayments were and are stress tested at 2% above the SVR, 6.25%/6.5% currently.
2. All borrowers had to and have to show “proven repayment capacity” for a minimum of six months and in some cases, 12 months prior to making a mortgage application. Borrowers had to save or pay rent equivalent to the stressed mortgage repayments.
3. All borrowers have to have a minimum net income after the stressed mortgage repayments, namely a single person needs a net income of € 1,100/€ 1,300pm, a couple needed €2,000pm and a couple with 2 children needed € 2,500pm i.e. €250pm additional net income per child.
The additional new Central Bank rules are as follows:
1. LTI is restricted to 3.5 times income.
2. For First Time Buyers, max loan to value up to € 220,000 is 90% and 80% of the difference thereafter.
3. 80% max loan to value for second time buyers.
Let us look at a number of aspects of these changes.
1. First Time Buyers buying a new home in Dublin for € 325,000. They will need a deposit of €48,000 as 87% LTV is maximum that they can borrow. Equally to qualify for a mortgage of €284,000, a couple will need a combined salary of € 81,100pa. The average industrial wage is €36,000pa. A single applicant will need a salary of €81,100.
The stressed repayments @ 6.25% on a mortgage of € 284,000 are €1,749 pm, the actual repayments are €1,291 pm but to rent this property would cost €1,400pm.
2. Applicants who have an existing property who want to trade up are restricted to a maximum LTV of 80%, so in the example above they will need a deposit of €70,000. Equally, if they have to retain this property and they are on a Tracker Rate, average of 1.05% currently, banks are “obliged” to stress test this mortgage @ rates ranging from 5% -6.5% which means they cannot borrow to trade up. Why have the banks to stress test an existing Tracker Mortgage at 4/5% above the current contracted interest rate.
Every week, I meet single or joint applicants who cannot buy because of the imposition of this stress rate of 4%/5% above the contracted interest rate which they have. Why not simply stress test @ 3% i.e. 2% above the current interest rate.
Let me give you an example of what is happening to this type of customer. A person who has an existing mortgage on the family home where mortgage repayments have been paid monthly, no arrears and which is being sold. The equity from this property will assist with the mortgage to buy the new home. They have €50,000 in savings.
They own a buy to let property, not in negative equity where full capital and interest payments are being made. The property is let to Dublin City Council for five years at a fixed rent which is €150 pm more the mortgage repayments, mortgage outstanding is € 135,000. They are self- employed and this property will act as a pension for them.
The mortgage is on a tracker rate of 1.05%. However, all banks in assessing the repayment capacity for the new mortgage to buy a family home are stress testing the mortgage repayments on the buy-to-let mortgage @ 5/6% , 4/5.5% above the contracted rate which means they cannot borrow a single € to assist with the purchase of the new home. They require €100,000 on a purchase price of €281,000, a loan to value ratio of 36%.
Yet, they were offered € 40,000 to buy a new car this week by a bank who declined the mortgage application.
3. We still have over 300,000 existing tracker rate mortgage customers. As an incentive for these customers to consider moving house, all banks should allow them transfer the tracker rate to the new mortgage over the remaining term of the existing tracker mortgage. Currently not all banks offer this facility and some banks only allow a five-year period.
The banks are charging an interest rate of 1% above the existing tracker rate which is fair but they must match the tracker rate with the existing tracker term.
4. The current negative equity mortgage product is not fit for purpose. Only 300 negative equity mortgages were transacted in 2014. This product needs to be completely revamped. We still have over 200,000 people in negative equity
5. The new Central Bank rules have exemptions and allows banks to lend 15% of their loan book at 90% LTV and 20% of their loan book at greater than 3.5 times income. However, borrowers cannot qualify for both exemptions and with two months remaining in 2015, AIB and Ulster Bank are closed for any business in 2015 which require an exemption from the Central Bank rules and the other three banks will close for exemptions within two weeks, in my opinion.
This clearly indicates that the rules are not reflective of the demand in the market. It creates a very difficult problem in 2016 when we have a full year of the new rules as if this trend continues, the exemptions will run out a lot earlier in 2016.
