Tuesday 20 March 2018

Cash-poor buyers could pay €50,000 more for mortgage

Now is the time for first-time buyers to get a foot on to the property ladder, writes Louise McBride

'Click to enlarge'
'Click to enlarge'
Louise McBride

Louise McBride

Cash-poor first-time buyers (FTBs) are paying as much as €50,000 more for mortgages than their wealthier peers, an analysis by the Sunday Independent has found. This is because house hunters who can save no more than the minimum deposit required to buy their first home are being offered much more expensive mortgages than those who have a larger deposit - or a handsome dig-out from their parents - to hand.

The Sunday Independent teamed up with mortgage broker Dowling Financial to examine just how much more cash-strapped FTBs were paying for a mortgage than their wealthier counterparts.

Dowling Financial calculated the cost of a 25-year variable mortgage of €262,000 for two FTB couples who are seeking to buy property in Dublin. The first couple have the minimum deposit required to buy a home worth €300,000. That deposit is €38,000.

The second couple have a deposit of €100,000 from their parents towards the cost of buying their home. That couple also qualify for a mortgage of €262,000. They plan to make full use of the €100,000 deposit and buy a home worth €362,000.

Even though both couples are borrowing the same amount, the couple with the smaller deposit could pay tens of thousands of euro more in mortgage interest over the lifetime of the mortgage than the couple with the bigger deposit.

Ulster Bank, for example, will charge the couple with the larger deposit €114,830 in interest over 25 years, according to Dowling Financial. However, the couple with the smaller deposit are charged €166,010 in interest - about €51,000 more.

KBC Bank would charge the couple with the larger deposit €118,958 in mortgage interest over 25 years. The less affluent couple, however, face a mortgage bill of €131,489 - almost €19,000 more.

In recent years, banks have started to reward those who put forward a greater deposit. Typically, the lower the portion of the value of a home borrowed, the cheaper the mortgage. This, of course, penalises the many FTBs who are struggling to get the deposit together to buy their first home because such buyers will typically borrow the highest possible portion of the value.

FTBs face many challenges in today's property market. They are finding it increasingly difficult to compete against cash-rich buyers when bidding for a home. Six years ago, one out of two of those buying a home or apartment was an FTB. That has since fallen to one in four as cash buyers and investors muscle in.

Many FTBs have been struggling to get the deposit together to buy a home since the Central Bank's new mortgage rules kicked in almost two years ago. This is particularly true in Dublin, where house prices are typically more expensive than the rest of the country. Under the Central Bank's loan-to-value (LTV) rules, where a house is worth more than €220,000, FTBs must put forward a deposit equivalent to 10pc of the first €220,000 - and 20pc of the balance. FTBs therefore often need a higher deposit to buy in the capital than they did before the new rules came in.

Budget help-to-buy scheme

This month's Budget is expected to include a tax rebate scheme for FTBs which may offset the impact of the Central Bank rules. The exact details have yet to be unveiled, but that rebate could be worth up to €10,000.

There are concerns, however, that any new help-to-buy scheme could push up prices.

"Giving people more money to compete for the same number of properties is likely to just drive inflation," says John McCartney, director of research with Savills. "Some form of tax credit over time may, however, have less of an immediate impact on house price inflation."

How to get a head start

If you are an FTB eager to get on to the property ladder, it would be wise to get a head start on the other buyers who might be encouraged into the market if a help-to-buy scheme is announced.

So have your mortgage approval in place by - or very soon after - Budget Day. It could easily take between two and four weeks to get full mortgage approval, provided all your paperwork is in place and you have a clean financial history. So get moving if you haven't already approached your bank. Tidy up your finances too - most banks will turn their nose up at you if you're a big credit card spender, are regularly running up overdrafts or are clearly unable to make ends meet.

Don't panic or rush in the quest to buy a home as this is how costly mistakes are made.

Your key priorities should be to find a home you will be happy to live in - at the cheapest possible price. As most people borrow the money for their first home, it is your mortgage that ultimately determines how much you pay for your property in the long run.

So shop around lenders and choose the one that gives you the cheapest interest rate over the lifetime of your mortgage as opposed to the bank offering the most tempting financial sweetener. The value of sweeteners (which include mortgage cashback offers or free legal fees) can pale in comparison with the savings that can be made with a cheaper lender.

The cheapest lenders for an FTB couple borrowing €262,000 to buy a €300,000 home are AIB, KBC and EBS, according to Dowling Financial. Bank of Ireland is the most expensive lender for the couple, followed by Ulster Bank and PTSB.

Don't be afraid to ask for a digout from your parents if they have the money. The bigger the deposit you can put towards your home, the cheaper your mortgage.

Be ready to battle with cash buyers, investors and wealthy returning emigrants. "Vendors always prefer to sell to cash buyers," says McCartney. "Some FTBs are returning emigrants who have considerable savings or assets in another country. About 11pc of FTBs buyers who bought through Savills are entirely cash-funded. Many FTBs are receiving family assistance."

Don't, however, be too daunted by cash buyers and investors, advises Michael Dowling, chairman of the Irish Brokers Association's mortgage committee. "Cash buyers aren't necessarily buying the typical three-bed home that an FTB would buy," he says. "They're often going after the larger five-bed properties. Many investors go after the more lucrative properties in places where the rental return will be higher."

The main challenge for FTBs is the severe shortage of houses coming up for sale, particularly in Dublin, according to Trevor Grant, chairman of the mortgage broker lobby group, the Association of Expert Mortgage Advisers. "Unless you have very wealthy parents, the odds are stacked against you if you are an FTB in Dublin who is paying very high rent because it will be very hard for you to get the deposit together," says Grant. "FTBs are being pushed out to the commuter belt to buy."

Know exactly what you're getting into before moving to the commuter belt. You could spend three or more hours a day commuting and petrol bills will also stack up. Should you move away from family and have young children yourself, you could find the lack of nearby support very challenging.

Many FTBs have been sitting on the fence in the hope that the Central Bank will relax its lending rules. It will publish the first review of the regulations next month. However, it recently hinted that it will not be making any changes to those rules.

As is often the case in property, it's still very much a game of wait and see. However, with the Budget just over a week away - and the Central Bank's review out soon - now is as good a time as any for prospective buyers to get ready to buy.

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