The recent decision by the mortgage lender EBS to reduce the amount that they will lend to mortgage applicants did not come as a great surprise and other lenders may follow their lead. The obvious implication here is that buyers will be able to borrow less so this will increase downward pressure on house prices. How did we get here?
In 1982, a couple on a combined salary of IR£8,500.00 could get a mortgage of IR£18,000.00, in 2006, on the same salary they would have been approved for between €51,000 and €59,500. The differences were caused by the banks lending criteria. In 1982 mortgage approval was based on three times the main earner and half the supporting salary and for a maximum term of 20 years. In the ensuing years banks changed their lending criteria in line with their motivational ethos of profit. Lending criteria increased in some instances to seven times combined salaries and over a maximum term of 40 years. The profits to be made were enormous.
Now that we are in a crisis the banks have been drawing back slowly from their reckless lending practises. But this poses more problems as borrowers are aproved for less, a good thing in our view as we want our clients to borrow less and buy better. But what about the vendor, who has seen their property values tumble and are set to see them decrease further due to this tightening of lending criteria.
There may be more bad news on the horizon for vendors, as the next adjustment to lending criteria could see the maximum mortgage term being reduced from 40 years to 35 or even 30 years. This reduction in term will further reduce borrowers purchasing power and therefore will have a further negative knock on effect on property prices.
Financial Institutions are reducing the amount you can borrow, but EBS are also telling you where you can buy and live. Should other lenders follow, this could give rise to other problems. Remember it was Financial Institutions who authorised and encouraged lending to developers in what EBS now identify as “non-viable locations”. Did they not check local planning applications and demographics? Where was their due dilligence, duty of care and best advice? Bank’s lending practices are returning to the safe levels of the 1990’s, will property prices follow suit?
‘Another fine mess you have gotten us into….’
In our last blog we gave our thoughts on how banks and their lending practises helped to create the property bubble. Since then it has been announced that new regulations are to come into place which will further reduce a borrowers lending capabilities. As stated in an earlier blog, this may not be a bad thing to happen as we believe that home buyers should be looking to borrow less and buy better.
But there is another problem which without managment and indeed government intervention could drive down property values even further and have a disastrous effect on thousands of home owners.
The banks are stating that mortgage arrears are presently running at just over 4% based on a 90 day roll-over period, this figure may be some way from the truth. It does not include mortgage holders who have entered into agreements with their lenders and have taken a payment holiday and/or gone interest only.
When those mortgage holders come to the end of their payment holiday and/or interest only period, then what? In most cases their employment and income status will have stayed the same and in some cases deteriorated even further.
What plan’s, if any, are being made by the banks and government to rescue these troubled mortgage holders?