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Saturday 18 November 2017

Borrow up to five times your income? No probs!

Sarah McCabe posed as a first-time buyer to ask the country's banks for a mortgage. The offers she got would ring alarm bells in other countries

LEEP LOOKING: But Irish banks are more than willing to stoke up bubble-era size loans, by offering multiples of an applicant’s salary
LEEP LOOKING: But Irish banks are more than willing to stoke up bubble-era size loans, by offering multiples of an applicant’s salary
Sarah McCabe

Sarah McCabe

Walk into Blackrock DART station with amnesia and you might be convinced that it is 2006 once again.

"We pay first-time buyers' stamp duty!" blares the Bank of Ireland billboard ad towering over the pretty south Dublin train station.

Mortgage promotions are popping up like mushrooms after a damp summer.

KBC is offering free home insurance for new mortgages drawn down before the end of the year, or a €1,000 payment towards borrowers' legal costs for those that switch over their mortgage.

AIB's very middle-class-sounding 'top-up' programme appeals to homeowners who "are thinking of extending the kitchen or building a play room".

Permanent TSB is promising a decision for first-time buyers within 15 minutes.

All come with terms and conditions, but the message is clear - banks once again want to sell us mortgages.

After years of no credit, all of the key indicators show mortgage lending is undeniably on the up.

Recently issued Central Bank statistics revealed lenders approved just over 4,800 new mortgages between April and June of this year - a rise of almost 50pc on the same period last year. The value of these transactions was up 60pc.

We also know why.

"Older households and businesses are still paying off their loans and trackers are making nothing for banks - they are starved of ways to make money" says Goodbody stockbroker's chief economist Conall MacCoille.

"Now, with house prices rising, first time buyers who delayed getting on the ladder are finally there for taking. Banks want to snap them up."

Some of the most dubious lending practices of the boom have disappeared.

"It no longer matters if your parents act as guarantor on your loan, or whether there is potential to rent out a room in the house you want to buy," says Diarmaid Sheridan, banking analyst at Davy Stockbrokers. Previously this could have added €35,000 to your mortgage.

But others remain.

I got quotes for a mortgage with four of the country's biggest lenders - AIB, Bank of Ireland, Ulster and Permanent TSB.

I presented a variety of characters: a single female in her twenties with an income of €36,000; a woman of the same age on an income of €50,000 and a married woman in her thirties with a household income of €100,000, all first-time buyers.

Across the board lenders were willing to offer me between four and five times my earnings. Most do not calculate mortgages with that method, but the end result is the same.

None of their deposit requirements exceeded much more than 10pc of the total loan.

These kind of lending policies were not always the norm.In the years before the boom, a mortgages of three times the person's salary was the standard.

But that crept up to four, five and six times salary in the heady years of the late noughties - and has yet to return to what it was.

"New mortgage lending to first-time buyers is now at similar loan-to-income multiples to those seen during the height of the boom in 2007," a study for the Irish Banking Federation found earlier this year.

A similar pattern is evident in the UK - but Britain's government has taken action. UK regulators are determined to prevent another property bubble. Britain's housing market, like Ireland's, has rebounded sharply following the financial crisis.

From October, the Bank of England will only allow 15pc of all new mortgages issued in Britain to be at multiples of over 4.5 times a borrower's income.

Business secretary Vince Cable said he was "appalled" that banks were lending up to five times applicants' incomes.

The desires of individuals to own homes in popular areas cannot come before financial stability, he said.

British regulators have also asked banks to impose stricter stress tests when determining the sustainability of mortgages. Since July, British borrowers have had to show they can repay their home loan even if interest rates rise 3pc, compared with the 2pc test required in Ireland.

Lloyds has voluntarily gone a step further. It recently limited its own people from offering mortgages of more than four times a salary for properties over £500,000.

But most Irish economists are not enthusiastic about the idea of a similar cap in Ireland.

Caps hand over the advantage to cash buyers, who snap up everything," says Karl Deeter of Irish Mortgage Brokers. He and Daft economist Ronan Lyons reserve their criticism for the deposit expected of today's Irish borrowers.

In the same way the UK has introduced a multiples of salary cap, lots of other countries that suffered from the collapse of a property bubble, from New Zealand to Hong Kong, have introduced mandatory deposit requirements. In some cases buyers must stump up 20pc.

"Before the boom years, a cushion [deposit] of 20pc was considered the norm," says Lyons.

Today's standard 90pc Irish mortgage is "very high" compared with other countries, he adds. "It's my understanding the Central Bank is looking into this - but you need those kind of measures to kick in before demand begins to grow, which has already happened here."

"They can't just turn around now and tell first-time buyers who have waited for years to buy that they'll need to save another €40,000. I don't know why they have held off."

Sunday Indo Business

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