First-time buyers can't bank on a house

Do not expect any softening of the Central Bank's plan to restrict access to mortgages, says John Hearne

The landscape for first-time buyers has changed dramatically in the past 10 days. The Central Bank, concerned at rapid rises in house prices in Dublin, is planning to order the banks to restrict access to mortgages.

If their proposals come to pass, the vast majority of first-time buyers will have to find a deposit of 20% of the value of the house in order to secure a loan on it. That's €50,000 on a house worth €250,000. For a couple who had been aiming for the 10% deposit that was required until now, they will suddenly find themselves looking around for an extra €25,000.

If the same couple had been saving an ambitious €500 a month, they will now have to keep that up for more than four years to make up the difference. It's anyone's guess where house prices will be at the end of that period, and who knows too what that €50,000 will get you at that point.

The Central Bank also plans to make the banking sector conform to a 3.5 loan to income rule across most of its mortgage loan book. So if you're earning €30,000 a year, you can't borrow any more than 3.5 times that, which is €105,000 Publishing the consultation paper that detailed these proposed changes, deputy governor of the Central Bank, Stefan Gerlach said the primary objective was to boost the resilience of the banking and household sectors to the property market.

"In Ireland we are still experiencing the destabilising effects of a property bubble. Our research has shown there is strong evidence that mortgage losses are much higher where borrowers have a high LTV (loan to value) or LTI (loan to income) rate. We believe that measures such as these are a standard part of a well regulated financial system and introducing these precautionary measures should contribute to a stable and well-functioning mortgage lending market."

Not everyone sees it like this. Karl Deeter of Irish Mortgage Brokers points out these measures could well leave first time buyers worse off. He gives this example in his blog: "If you were to buy a house costing €250,000 today using a 90% loan at 4% over25 years, then in three years’ time you'd have a balance of€208,000. If property prices rose 3% a year every year during the same period you'd be buying at (250k *((l+r)An)) which is just over€273,000. What's 80% of that? €218,000."

"So you'd owe more at that point in time having had to face rising rents and half your money being taken in tax during that time while trying to save the extra 10% deposit." The Central Bank's proposals are no more than proposals at the moment.

You can read the consultation document which goes through them in some detail on the bank's website, centralbank.ie, and you can also contribute your two cents to the debate by emailing real-estate@centralbank.ie by December 8. In addition to the angry backlash by the mortgage industry, there's also evidence of political pressure on the bank to re-consider the 80% rule.

On Wednesday's Morning Ireland on RTE Radio 1, Tanaiste and Minister for Social Protection, Joan Burton pointed out that the proposed rule changes were not set in stone and said that the20% deposit 'does seem quite high'. The Central Bank is however an independent body, and with the housing bubble and the regulatory failures that contributed to it fresh in everyone's mind, do not expect any softening of the bank's position.

The budget did throw first time buyers a bone. If you're saving for a house, you can get a rebate on the DIRT paid, up to 20% of the value of the house. Even with DIRT at41%, that's not a game changer. For the aforementioned couple managing to save €500 a month in Permanent TSB's regular saver account, the measure is worth about €66 per year.

Simon Moynihan of price comparison site Bonkers.ie says that the banks generally regard regular savings accounts as loss leaders.

"The idea is to get someone into the savings habit. That's how they work. They're always limited in the amount you can put in and the amount that you can have as a total deposit." Right now, there's huge variation in the regular savings market, with some providers offering little or no return and some offering very decent value. The trouble is that regular savings accounts are so full of terms and conditions that comparing like with like isn't easy.

Take the first account on the list above, the Nationwide UK (Ireland) Regular Saver Account. 4% AER looks like fantastic value, and it is up to a point. But the terms and conditions strip away a lot of that value. The term of the account is just 15 months. Also, the second the balance exceeds €15,265, the rate falls to a paltry 1.05%AER. The account that pay sthe next best rate, the KBC Regular Saver, is a little more attractive. "It's paying3.5% and the maximum balance is €50,000," says Simon Moynihan, "that's why I like it." If you have outstanding loans, paying money into a savings account may be the wrong thing to do. The National Consumer Agency offers this powerful example: Suppose you have a €10,000 loan over four years, at an interest rate of 10.1%. If you paid an extra €100 a month from the start of the sixth month, you would save €583 in interest and clear your loan 13 months quicker.

By comparison, if you put that €100 per month on deposit, you would earn just €26 over a 12 month period, based on an AER of 4%. Because credit card and consumer finance are expensive, you're better to pay off the loan instead of save the money at a lower rate of interest.

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