Sunday 22 April 2018

How to get off the fence and buy a home

As the Central Bank loan rules may get tighter, it could be time to jump in and buy

Tom Halliday cartoon
Tom Halliday cartoon
Louise McBride

Louise McBride

House hunters sitting on the fence in the hope that the Central Bank will relax its controversial mortgage lending rules later this year may have to come up with a new game plan.

The Central Bank is set to review its rules this summer. As those regulations have made it difficult for many first-time buyers to get onto the property ladder (particularly in Dublin), many have been waiting to see if the guidelines will be loosened. However, at a recent briefing, Central Bank boss Philip Lane hinted that there is no major change on the cards.

So there is no guarantee the rules will be loosened. Indeed, they may well be tightened.

This, along with the belief held by some that investors are about to flood the market - and drive up prices as a result, mean it could be a mistake to hold off for much longer. So if you want to buy, what should you do to get onto - or move up - the property ladder?

Get ready to battle with investors

First-time buyers should prepare to be up against investors - as well as house hunters with big dig-outs from their parents.

"There's a big inflow of investors coming into the market in response to the high rental yields," said John McCartney, director of research with Savills. "This will generate inflation in Dublin. Investors are scrapping with first-time buyers because, like first-time buyers, investors often want apartments and smaller units. So you could get prices going ahead of the asking in the starter-homes end of the market. Parental assistance has come right back with a bang."

McCartney believes that investors will lead the property market more than they have in the past. "Cash investors will be a big part of that," said McCartney.

This would be a problem for first-time buyers - many of whom have already lost out to cash investors in recent years.

"Sellers are predominantly choosing cash buyers," said Margaret Penrose, administration manager with The Buyer's Agent.

There is still some solace for today's house hunters however - bidding wars are nowhere near as frantic as they were during the boom years, according to the property experts this paper spoke to.

Venture further afield

Should you be struggling to buy a house in Dublin, you could buy in the commuter belt for €100,000 less than you will in the capital (depending on the location and property). Be realistic about commuting times and costs though - a long commute could affect your quality of life. Petrol bills add up too.

Should the commuter belt be an option, don't procrastinate. While Dublin house prices have hardly budged since the Central Bank's rules were introduced in January 2015, prices in surrounding counties and other big cities have surged. Expect the asking price for a property in Laois, Louth or Kilkenny to be about a tenth higher than it was this time last year, according to Daft. In Limerick City, asking prices have increased by almost a fifth over the last year while prices jumped by 14pc in Galway City.

"The argument has been made that Central Bank rules have slowed house price growth in Dublin. However, the rules have simply redirected inflation to the commuter belt and rental sector," said McCartney.

Get around the rules

It is possible to get around the Central Bank rules - by seeking an exception.

You can either get an exception to the Central Bank's loan-to-income rules (which restrict your mortgage to three-and-a-half times your salary) or to its loan-to-value rules (which require most borrowers to have higher deposits than had previously been the case). You will not be granted an exception to both rules.

Banks are only allowed to grant exceptions for a fraction of the home loans on their books. You could therefore have a fight on your hands to get one - so put your best foot forward. A good savings history and sufficient deposit are crucial - as is a clean credit history.

If you are a professional, such as an accountant or a solicitor, who is in steady employment, you may have a better chance of getting an exception than an individual who works in retail. You could also find it easier to get an exception if buying property in Dublin.

About one in three house hunters are trying to get an exception to the Central Bank rules, says Michael Dowling, chairman of the Irish Brokers' Association mortgage committee.

Get a pay rise instead of a bonus

It is your basic salary - rather than overtime or bonuses - which ultimately determines how much a bank is willing to lend to you.

"You may earn a basic salary of €40,000 - plus €10,000 of a bonus," says Dowling. "Your bank is only interested in your basic salary. Bonuses won't usually be taken into account - at best, 20pc of your bonus will be taken into consideration."

Permanent TSB for example may take your bonus into consideration when determining how much of a mortgage it will offer - but it limits the value of the bonus taken into account to no more than 10pc of your basic salary.

The Australian lender Pepper said it will take 50pc of "guaranteed bonuses" into account when deciding how much of a mortgage it would offer. "However bonus payments are not taken into account when assessing the applicant's ability to repay the mortgage," said the spokeswoman for Pepper.

Build your own home

One of the biggest challenges you will face when house hunting is the dearth of homes coming up for sale - particularly in the capital.

Building your own home could be an option - but usually only if you are living in, or are from, the county. Buying a site in Dublin or other major cities is usually difficult and expensive. Buy a site outside the county you are from, or are living in, and you could run into problems with planning permission.

AIB, Bank of Ireland, Permanent TSB and Ulster Bank offer self-build mortgages but KBC and Pepper don't. You cannot get a mortgage purely to buy a site - such finance is typically only granted if it is part of an overall mortgage application to build a home.

Clean up your finances

You must provide your bank with a raft of paperwork when applying for a mortgage - and if the bank finds anything which worries it, you won't get a loan.

Don't underestimate the forensic ability of your bank. It will check if the figures in your salary certificate (a document signed by your employer which confirms your income) match those in your P60 and payslips. It will also check if the amount on your payslip matches what goes into your bank account.

Banks watch out for referral fees and unpaid item fees (penalty charges you are hit with when there isn't enough money in your current account to clear direct debits or cheques).

"If you have more than two referral fees over six months, you won't get a mortgage," says Dowling.

Lenders also frown on online gambling - so any evidence of online gambling in your current account will go against you. Avoid using your credit card to withdraw cash as it suggests you are struggling financially.

Team up

Anyone on an average wage can't afford to buy property today - if buying alone. The most that a single first-time buyer earning €35,000 can borrow today is €122,550 under the Central Bank rules - or €140,000 if he is granted an exception, according to Dowling.

The average asking price for a property in Dublin is between €249,033 and €517,774 - depending on location, according to Daft.

A couple on the average wage have a better chance of getting onto the property ladder - although they too will struggle unless they are flexible on location. Should each partner earn €35,000, the couple could borrow up €280,000 if they can get an exception, according to Dowling.

Of course, if teaming up with someone to get a mortgage, do so with a long-term partner that you are committed to and trust - or with another family member. Buying property with friends can be problematic.

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