The difficult first-time buyer's club
We're buying houses at later stages in life, and to some in their 30s and beyond, it's still a pipe dream. But just how difficult is it to get a foot on the property ladder in 2014?
You would be hard-pressed to find a woman who didn't own a Barbie Dream House growing up.
It was the hottest property ticket in town and obtaining one couldn't have been easier. Post your demands to Santa, steer clear of his naughty list for a while, and a few weeks later it appeared as if by magic. These days Barbie's Dream House is a three-bedroom semi-D on the South Circular Road, and getting it is a whole lot trickier. It's true that banks are lending more to first-time buyers than they were 12 months ago, albeit cautiously. But many find their limited borrowing power isn't enough to bid against rising property prices, even if they have stayed on the financial straight and narrow.
Gordon Lennox, director at Sherry Fitzgerald Greystones, says there has been a shift in trends. "Previously many first-time buyers came to us in their mid-to-late 20s, but over the last few years many have been biding their time until mortgages became available and so are now in their 30s. This means that whereas before a single person or cohabiting couple might have been happy to buy a terraced house or an apartment as a starter home, they now want something more permanent with room to expand should they wish to start a family."
Unfortunately there is a dearth of houses on the market at the moment as there aren't enough new houses being built to meet buyers' needs, which is driving up house prices. A disappointing situation to be in, if you've spent the last few years renting, climbing the corporate ladder at a time when you were lucky to be in employment at all, and waiting for the first sign of economic improvement.
"I'm actually on my fourth professional house share and I'm very ready to buy somewhere of my own," says Sarah Murphy, a 33-year-old IT consultant from Dublin who has been renting for the past eight years. "I'm probably going to move back in with my parents to save a bigger deposit, but it's not exactly a thrilling prospect at this stage of my life."
"Most people have to pay 1 percent Stamp Duty as a first-time buyer," says Martina Hennessy, director of Mortgage Horizons. "The banks are also far more cautious. When applying for a mortgage, you must show that you can afford the repayments on your own merit. 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. Previously, this could have added €35,000 to your mortgage."
Before you start looking for a house you need approval in principle from the bank. But even if it seems like the odds are stacked against you, it's not impossible to make that first house purchase if you get your affairs in order to meet the criteria required by lenders. "Sometimes I have to tell people that they will most likely be declined," says Ronan MacKay, director of NC Mortgage Brokers. "But part of a mortgage broker's role is to give advice on how to strengthen an applicant's position, say over a six-month period, so they have a better chance of approval in the future."
While the mortgage game can appear confusing, it's important to learn the rules in order to succeed. "It's actually quite simple, we look at an applicant on the basis of earnings from permanent employment, followed by evidence of repayment capacity," says Martina Hennessy. "If an applicant is a PAYE employee, we look at their salary and whether they have been permanently employed for the past 12 months without any gaps."
Being self-employed doesn't exclude you from mortgage approval. According to the CSO's most recent Quarterly National Household Survey, the number of self-employed people in Ireland increased by 11.5 percent in 2013 and lenders recognise that not everyone works a nine-to-five office job. "A self-employed person must produce three years of accounts," says Martina. "Lenders look for sustainability as regards income. If you're employed by a firm as a contractor, which is common in industries like IT, the lender will look at the overall proposal. Have you had other long term contracts with that company? Is the industry you work in at the moment sustainable?"
This income, whether PAYE or self-employed, sets the upper limit of the mortgage amount. The actual amount you can borrow is based on how much you can afford to repay, including savings and outstanding debt. "These days banks stress-test mortgage repayments. If the standard variable rate of interest is 4.5 percent, the lender will add 2 percent, so that if the rates increase over your mortgage period there is a buffer," says Martina. "For example, if you borrow €200,000 your monthly repayment will be approximately €1200 a month, or €600 for every €100,000 you borrow."
Can you handle the stress?
Even if you are lucky enough to have parents who can gift you a 10pc house deposit, this doesn't show your ability to repay a mortgage loan. As a first-time buyer, a lender will calculate your loan affordability based on your average monthly rent plus savings over the last six months.
However, this doesn't include recurring costs like house insurance, life assurance and an annual management fee if you buy an apartment, so a little extra cash in your monthly budget is essential too.
"A big mistake people make is that they pay rent in cash, even when living with parents," reveals Ronan Mackay. "A standing order is essential to show the bank that you pay rent every month. And don't worry if your rent has gone up lately, which most rents have. If you are paying more rent and saving less than before, you are ultimately repaying the same average between both, just in a different ratio."
But of course this makes saving for that deposit a little harder.
"Don't commit to a large savings amount to the detriment of your current account," advises Martina Hennessy. "If you end up with referrals, in your overdraft, or drawing down your savings to top-up your lifestyle it shows the bank that you are living beyond your means. They won't consider the fact that you could cut down on your discretionary spending."
No Deposit, No Chance?
Many banks will lend you 90 percent of the cost of your future home, so you must come up with the other 10 percent. "Currently AIB and EBS offer 92 percent mortgages, which means that you only need an 8 percent deposit," says Ronan MacKay. "Saving the extra cash for a 10 percent deposit could save you money over the course of your mortgage."
If you're looking to build up your deposit amount, there really is no other way other than to knuckle down and save smart.
Michael Culloty, spokesperson for Money Advice and Budgeting Service (MABS), says people are hopeless at shaking out their finances and seeing where they can make savings.
"Firstly maximise your income, so start with your tax. Register for PAYE Anytime on the Revenue Commissioners website (www.ros.ie), which will show whether you are being taxed correctly and whether you're receiving any tax credits you are entitled to such as health expenses, flat rate expenses, rent relief and so on," advises Michael.
"If you have some savings, ask your bank about moving them to a deposit account, which offer better interest rates on lump sums," he adds.
Now that you have maximised your income and savings, look at your outgoings. "It sounds really boring, but the first thing to do is make a budget," says Michael. "It puts you back in control of your money. As you can see where it's going, you can make conscious spending decisions." Michael also suggests keeping a monthly spending diary which can be downloaded from www.mabs.ie. Once you have recorded your expenditure, see where savings can be made on that amount. "Start with your priority creditors, like household bills, and then look at your discretionary spending."
You know that six-month trip to Australia you funded with your credit card which still hasn't been paid off? Outstanding debt needs to be addressed to maximise your borrowing power. "Banks do not like it when you have other loans or credit card debt because it affects how much you can repay per month, so pay those off as well as saving," advises Martina Hennessy.
Make repaying these debts as easy as possible by shopping around for better interest rates. "Something as simple as transferring your credit card balance to another credit card company might get you a better rate," says Michael Culloty. "Or if you've got a number of debts why not consolidate them into one payment, by borrowing from your Credit Union? They offer very good rates on small loans and will allow you to pay them off in one go."
There is no fast and easy way to get mortgage approval anymore. As a first-time buyer the property game is no longer rigged in your favour. It favours the safe, sensible bet over the bold and the bonkers buyers. And while the rules might seem a little constrictive, any sacrifices made by adjusting your spending and saving habits will be worth it when you finally turn the key to the door of your first home.
First published in INSIDER Magazine, exclusive to Thursday's Irish Independent