Keeping up with mortgage moves
05 Sep 2010
The mortgage market has changed significantly in the last two years, but how do the main trends affect you, the borrower?
The times they are a changin’. In fact, they have already changed beyond recognition. Ten days ago, ratings agency Standard & Poor’s downgraded Irish sovereign debt to AA and assigned a negative outlook. A little over a month earlier, Moody’s took a similar view, and downgraded Ireland’s government bond ratings to Aa2, citing banking liabilities and weak growth prospects.
For the international community, it is clear that Ireland has its hands full. An economic time machine has taken us back to pre-Celtic tiger days, complete with a retro blast of unemployment, emigration and a weak economic outlook.
The government has spent months trying to turn things around, introducing a series of deep and unpopular cuts, and assorted levies and tax changes in a bid to raise revenue.
The upshot for consumers is less cash, resulting in a domino effect that trickles across the whole economy, not least the mortgage market.
For those paying mortgages, this all means a greater struggle to repay their loan. Some 36,500 families cannot afford to pay their mortgage, with arrears levels continuing to rise.
For potential buyers, less cash in their pocket reduces their buying power and makes it harder to get a foot on the property ladder.
However, squeezed incomes are just one of many changes in the mortgage market. To a large extent, mortgage customers are merely pawns in someone else’s chess game.
They can’t control the moves and receive little advance warning of the plays ahead.
Here, we consider five of the main trends in the mortgage market, and what they mean for borrowers:
1. Demise of the tracker mortgage
In the heady days of boom-time Ireland, the popular choice for borrowers was a tracker mortgage. With a guaranteed margin above the European Central Bank (ECB) interest rate, borrowers had a degree of certainty regarding their repayments. They were also guaranteed the benefits of rate cuts by the ECB, though rate hikes were also passed on.
However, tracker mortgages are now extinct for new customers. Once the credit crunch struck in summer 2008, banks quickly pulled this type of finance, citing rising wholesale funding costs and the divergence between the ECB rate and wholesale lending rates.
For punters, tracker rates are usually a lot cheaper - particularly if interest rates are low or falling. Margins offered started from about 0.5 per cent above the ECB base rate, which would translate to a mortgage interest rate of 1.5 per cent now. While no Irish bank is offering tracker mortgages to new customers, existing customers should hold onto their tracker mortgage, since they offer the lowest rates in the market.
The Financial Regulator has urged lenders to ensure that consumers fully understand the implications of switching from a tracker mortgage, following an examination of switching practices.
Concerns were identified about the level of disclosure and transparency when consumers moved from trackers to other forms of mortgages. The examination found that, in some cases, lenders did not give customers fully transparent information about the financial implications and consequences of switching.
2. Increasing standard variable rates
After banks stopped offering tracker rate mortgages, borrowers were left with a choice between a fixed-rate loan or a standard variable rate loan.
The latter allows a bank to change the rate at its discretion - and change they have. A series of rate hikes by lenders in recent months has signalled that the days of cheap mortgages are over, for now at least. Banks say they can no longer afford to lend at such low rates, and must price lending more sustainably.
Borrowers have reacted angrily to rate hikes by lenders at a time when the ECB is keeping interest rates at a historic low of 1 per cent. The bad news for mortgage holders is that further rate rises are likely, with even more forecast once the ECB begins to move.
With further rate increases on the horizon for standard variable rate customers, borrowers must consider whether now is the right time to change to a fixed rate. Lenders offer fixed rates from one to ten years, but many have already begun to price in future rate hikes. If you plan to fix, it makes sense to act quickly before rates creep even higher.
3.The prominence of first-time buyers
First-time buyers now account for a larger share of the overall mortgage market, taking 38 per cent of all loans drawn down. According to the latest mortgage market data from the Irish Banking Federation and PricewaterhouseCoopers, the number of loans to first-time buyers increased by 27.8 per cent between the first and second quarters of this year.
According to the report, the average first-time buyer loan has fallen below €200,000, a level last recorded in 2005.
A mortgage market driven by first-time buyers can see movement quickly once people feel the bottom has been reached, because such would be buyers are ready to act, with no former home to sell. However, tighter lending criteria might mean some potential first-time buyers are being forced out of the market.
4. A tighter lending environment
Some borrowers were able to obtain 100 per cent finance when Ireland’s economy was riding high. Banks have now imposed much tighter lending criteria. Comedian Bob Hope once said that a bank was a place which would lend you money if you could prove you didn’t need it; in the current climate, many potential home buyers would agree.
However, while would-be borrowers view the changes in credit policy as restrictive, banks say they are just being prudent. Borrowers must now stump up a larger deposit, with banks only willing to lend up to 92 per cent of the cost of your home. Some banks will lend significantly less, so you may need a 20 per cent deposit if you opt for certain lenders.
Aside from requirements about deposits, banks have also tightened up in other areas. If you are buying a one-bedroom apartment or a property in a rural area, you may find a limited pool of banks to choose from, as some lenders have restricted the category of property they will finance.
A tighter lending environment means borrowers need to tidy up their finances and build up substantial deposits before they even consider applying for a mortgage.
5. Improved affordability - but with a catch
According to property website Daft.ie, the national average asking price for property has fallen by 37 per cent since the peak of the market. Now an average Irish property costs €220,000.For buyers - particularly younger ones or those on lower incomes - this represents a huge shift in the market, and an opportunity to buy their own home.
However, even though prices have tumbled, borrowers have yet to plunge back in. Many are biding their time, keen to see if prices fall further. Others want to buy now, but can’t secure the finance.
Today’s mortgage market is a maze of contradictions. Low ECB rates contrast with increasing bank lending rates, while imploding price levels compare with a dramatic falloff in the amount of loans issued. For borrowers, it’s a tricky puzzle to solve.
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