Need to have 10% of the value of a property priced €220,000 or under is delaying people in applying for a mortgage, says John Hearne
EARLY indications suggest that the Central Bank’s new deposit rules are having their intended effect. According to the latest daft.ie survey, in the last quarter house price growth in Dublin was slower than elsewhere in the country for the first time in four years.
"It's clear that the Central Bank rules have had an impact on the market," said the report's author, Ronan Lyons. "Dublin prices are now anchored to real economic conditions, with survey respondents expecting significantly slower house price growth now than a year ago.
Similarly, compared to a year ago, a far higher proportion of respondents, in the capital and elsewhere, indicated the need to save for a deposit as a key reason for delaying buying a home."
Under the new rules, as long as the value of the house is below €220,000, first-time buyers must have a 10% deposit. But for every euro the price exceeds that threshold, they must have a 20% deposit.
Take a house that costs €330,000. You'll need savings of €44,000 (10% of €220,000, plus 20% of the remaining €110,000), before the bank will entertain your application. Then there’s the variable rate rip-off. Irish mortgage borrowers struggle with the highest rates in Europe even though the ECB rates are at record lows. To add injury to injury, while the banks have great difficulty passing low rates to lenders, they have no problem passing them to people saving for a deposit.
KBC offer the best value in the market, with an AER of 3.5% on their regular savera ccount, which allows you to deposit between €100 and €1,000 per month, along with instant access to your savings. If you also switch your current account to KBC, you can squeeze an additional 1% interest out of them, giving you a total AER of 4.5%.
Deposit interest retention tax, or DIRT, is the party killer here, however. "Unfortunately," says Simon Moyni-han, of Bonkers.ie, "you're in a very poor savings environment at the moment, and without someone else coming into the marketplace and offering something worthwhile, or the Government reducing DIRT, that's not going to change."
In 2002, DIRT was only 20%. As recently as 2009, it was 23%. Now, at 41%, it has more than doubled in 13 years. "It's a substantial burden on people," says Moynihan, "and Irish people do have a lot of money in cash savings. And, as DIRT has doubled, interest rates have halved, so, as savers have been hit, the Government never got the wind fall it had envisaged." When you take DIRT out of that KBC 3.5% rate, you reduce it to just over 2%.
The other good value dealis the Nationwide UK (Ireland) regular saver account. It offers a 4% AER for regular savings of between €100 and €1,000 per month. But the account's structure is slightly unusual. Despite being billed as a regular saver account, it only has a 15-month term. Secondly, the minute the balance in the account exceeds €15,265, the 4% rate drops to 1.05% AER, which, after DIRT, is a little over 0.6%.
The rest of the offers in themarket place are very low. AIB and EBS offer regular saver accounts with rates of AER 2.25%. The best Ulster Bank can do is 2%, while Bank of Ireland offers a derisory rate of 1.35% on its 365 Monthly Saver Account.
It's worth mentioning the DIRT refund available to first-time buyers. This was introduced to not much fanfare during last year's budget. Mr Moynihan is not surprised.
"The DIRT refund, being kind to the Government, is not helpful. Being unkind to them, it's almost farcical. You have to apply for it after you pay for your deposit, and, even then, by the time you've saved your deposit you'd be very lucky to have more than a couple of hundred quid in interest."
So, it won't make any real difference to your ability to afford a house. Having said that, if you have saved for a deposit and you have signed for your first home, go ahead and apply for the rebate — better a couple of hundred quid in your pocket than in the Government's.
Before saving for a deposit, think about your overall financial position, particularly if you're thinking of opting for a savings account that commits you to a set amount every month. Work out a budget and come up with a realistic figure to set aside. And if something derails the plan, just start over again.
When looking for the right product for you, see if the account gives you the flexibility to top up with an additional payment, if things go better than expected and you have more left than you had hoped at the end of the month. Watch access restrictions, too. Some accounts will only allow you to withdraw at agreed times. The EBS Family Savings Account, for example, allows a maximum of two withdrawals per year. And in this era of re introduced charges, look at the fine print and make sure any bank charges are kept to a minimum.
In the same vein, if you're paying €20 a quarter in charges because you can't maintain the minimum €2,500 in your account to qualify for free banking, consider lodging your savings direct to your current account. If those savings are languishing in a low interest deposit account with the same bank, you might be better off using them to qualify for free fees.
Note, too, that if you have outstanding loans, paying money into a savings account may be the wrong thing to do. The Competition and Consumer Protection Commission 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 more quickly. 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 debt tends to be expensive, you're better to pay off the loan, instead of save the money at a lower rate of interest.
For more detail on the different products that are available, check out bonkers.ie or the financial product comparison section of the Competition and Consumer Protection Commission site.