Agent View: Ian Finnegan
The Central Bank's regulations on residential mortgage lending have helped to take some of the steam out of the market, but have also had the undesired effect of keeping a large number of potential purchasers in the rental sector. When any section of the market is not functioning, it has a knock-on effect on all the other sectors.
The recent Budget provisions only help FTBs acquiring new homes, preventing second-hand starter home owners from moving on. The Loan-to-Value restrictions combined with the Loan-to-Income restrictions mean that it is increasingly difficult for renters to buy and for people to sell their existing home for a more suitable one. Renters should be acknowledged for having paid rent as proof of their ability to service a mortgage. The Central Bank's aim is "to reduce the risk of bank credit and house price spirals from developing in the future" but at what cost to the rental sector and spiralling homelessness?
In commercial real estate lending there is a source of funding called mezzanine finance which helps bridge the gap between normal bank finance and the full sale price. Could this be adapted to the residential market? Many FTBs are renting properties for considerably more per month than it would cost them to service a mortgage for a similar property. The difference between the rent paid and the cost of servicing a mortgage could be used to finance top-up or mezzanine finance. For example, a person paying €1,500 per month in rent may only have to pay €1,000 per month to service a mortgage, therefore €500 per month (or €6,000 per annum) could be capitalised up to say €20,000 towards their deposit to be paid down over a four- or five-year period while the main mortgage would still be amortised over 25 or 30 years.
The fundamental problem for banks is that they lend long-term money while borrowing it short term on the interbank market. However, pension funds and insurance companies have access to long-term money enabling them to supply long-term mortgages which could leave the banks to supply shorter term mezzanine finance (the norm in US commercial financing). This would help to bring stability to the financial market by reducing longer term exposure to higher LTVs. Mezzanine finance would help FTBs to buy second-hand properties and would assist people owning existing starters homes to trade up, which would help free up both lower cost housing and rental properties where there is a critical shortage, benefitting FTBs and helping to tackle homelessness.
- Iain Finnegan is managing director of Finnegan Menton