Will 2018 be the year of the credit union mortgage?
The banks may have finally loosened their purse strings... but now there's a new big lender in town
The year 2017 will be remembered as the one in which the banks finally loosened the purse strings on mortgage credit proper.
With loan books being managed more efficiently, arrears continuing on a steady downward trend and the sale of part of AIB (which meant far more in principle than it did in monetary value), it was the year the mortgage market finally got straightened out.
But there weren't enough houses to buy in the greater Dublin area. The upward pressure on price (and by extension, loan values) was unabated within the bounds of Dublin's M50.
"This year will be more of the same," says mortgage broker Karl Deeter. "It's the same boats, but the level of the tide has lifted." He says the market is "out of control", and he doesn't see the new year bringing a tapering in demand, or enough of a shift in supply.
When it came to accessing borrowing, Deeter says the Central Bank managed to keep a lid on credit supply during the year but adds that there has been too much emphasis on their reach. "I wish everyone realised that mortgage rules don't control lending; they are simply a tool".
That may be so, but the pre-Christmas review of lending saw a reclassifying of the percentage of borrowers who can avail of the 'off book' loans - that is, those that don't strictly meet the Loan to Income (LTI) or Loan to Value (LTV) criteria. This was moved to favour first-time buyers (FTB) over trader-uppers, and not for the first time.
FTBs tend to be younger, with better careers ahead of them, and three decades to pay down their loan. That makes them well liked by banks, who are unfazed at the relaxation of deposit rulings. They can access 90pc loans (with or without gimmicks) for under 3pc p.a. if they look around (see panel). If they're prepared to lock in for a year or two on a fixed rate, they can do even better.
Broker Eoin McGee of Prosperous Financial Planning and RTÉ's This Crowded House says, "There is most definitely an underlying current that banks prefer to lend to FTB versus trader- uppers. A first-time buyer will get a more attentive ear from a mortgage provider. It is obvious the political pressure that exists to get more people into homes is making its way somehow to the bank boardrooms.
"In contrast, trader-uppers get hit on the double when supply of housing is so tight, because the vendor has always favoured the FTB who is not in a chain, rather than run the risk of the trader-upper not being able to sell their home."
Deeter says market buoyancy will result in commuter counties seeing disproportionate price increases this year as trader-uppers move out of negative equity (and their shoebox apartments) and look further afield.
"We have Brexit workers arriving here too, from the EU and Britain, looking for accommodation, and we have a tendency to do well in property when the UK suffers." It may well be the only way we do.
So now that they're no longer indulging in wound-licking, how will lenders respond to this? At the same time, the Central Bank's eye has hardened on the tracker crisis.
'Exceptions' to the rule
McGee says it's "a lot easier" to pick up a mortgage now than this time last year. "The Central Bank rules being relaxed had a role to play in this but I also feel that the banks themselves becoming accustomed to the rules, and in particular getting to grips with how to manage their 'exceptions', has also played its part. When the rule was first made, we had several banks going over their exceptions in October and having to ask brokers to 'hold off good cases until the new year'. That certainly wasn't as prevalent in 2017."
But he warns against complacency with potential borrowers. "Damaged credit history remains a problem and - although 12 months ago, a minor mishap on your credit meant the door closed on you completely - banks do consider a reasonable explanation when it is very minor now. We are still, however, a long way from the days when people could explain why they didn't bother paying the mortgage for two months last year because they were going [on holiday] to Orlando and the bank still did a switcher for them.
"Online gambling is also a serious concern for the bank and is an absolute no-go if you want to improve your chance of getting a mortgage. The banks just don't like it."
His advice? "Don't gamble - or at least don't do it through your bank accounts. Keep your credit rating clean, and save, save and save."
Deeter points to the continuing low competition in the sphere. We really only have six lenders, apart from subprimes, although political pressure to lower interest rates should continue, especially among the State-owned lenders.
"Fixed-rate loans are funded by variable-rate money borrowed, now, at just -0.2pc. A negative yield curve means banks are getting a great margin by lending on at 3-4pc. They're spending less on impairments as we enter 2018 and there's more cash available for profitable lending."
But is there a serious new player out there which might shake up this market even further?
Just before Christmas, the Central Bank added a bauble to the lending tree in the form of giving the nod to credit unions who are finally finding their feet with long-term borrowings.
It did so in a cautiously worded press release, which noted assets in the sector had increased to €16.8bn after a decline in loan-to-asset ratio from 37pc in 2012 to just 27pc now. "This is a key measure of credit union financial health," the regulator said.
Credit union mortgages
Credit unions are chronically under-lent as a sector, mainly because people still think of them as providing short-term, small-league community loans.
Despite some consolidation and a few shot-gun weddings between outliers, credit unions may finally be able to take their place in the mortgage market.
Ten-plus-year lending has already increased from €59m to €87m over the last two years and liquidity is strong. Too strong - so they need to get the money circulating.
Kevin Johnson is CEO of CUDA, one of the sector's umbrella groups. It manages the Solution Centre, which is already providing residential mortgages in a limited way.
"We spent 2016 and early 2017 developing this mortgage framework, and we see it as a significant milestone for the credit union movement. Since launching our mortgage solution in the middle of 2017, almost €20 million in mortgage lending has already been processed with €8 million drawn down and a further €12 million in the pipeline. We expect volumes to ramp up as an increasing number of credit unions sign up to the service."
The credit union mortgage product was launched earlier this year following Solution Centre research, which found that over 59pc of credit union members and 38pc of non-credit union members would consider switching their mortgage over to a credit union if a better deal was offered.
The credit union mortgage product is focused on providing mortgage lending for a number of specific purposes - Tenant Purchase Schemes, Affordable Housing Schemes, those trading up and first-time buyers.
"Across all the mortgages processed, we see that the typical borrower is in their 40s, draws down a loan of €106,000 over 15 years at a loan-to-value of just 52pc, and anecdotal evidence suggests to us that these customers are likely to feel more comfortable working with their local credit union than they are dealing with a bank."
Unlike banks, credit unions aren't required to deliver profits for shareholders so anything offered is priced to meet the needs and demands of members and factors in all relevant risks. Credit unions are ideally placed to fill the gap in the market left by building societies.
But even as we enter a year of stable mortgage lending, most borrowers will remain far more concerned about housing supply - that is finding a home - than what interest rate they'll be paying.
Compare the banks
First-time Buyer loan of €350,000 based
on house value of €400,000 for 30 years
Lender Standard Variable Monthly Equivalent
Interest Rate Repayment 1-year Fixed Rate
AIB 3.15pc €1,504.08 3.2pc
KBC 3.5pc €1,571.66 2.9pc
Permanent TSB 3.9pc €1,650.84 4.2pc
Pepper 3.9pc €1,650.84 —
Ulster Bank 4.3pc €1,732.05 —
Bank of Ireland 4.5pc €1,773.40 3.0pc
* Figures courtesy CCPC.ie