Irish Mortgage Brokers Blog

We have made a few more bold predictions in our ‘Mortgage Market Trend Outlook 2012′ and reviewed how wrong many of our 2011 forecasts were as well.

Some of the main points thus far are:

1. That mortgage lending bottomed out in 2011.
2. That IBRC may take on some tracker loan portfolios to de-risk state owned banks (as the state already owns these loans entirely anyway).
3. That rates for existing AIB borrowers will have to go up but that for new borrowers rates may come down with changes to how prices are charged depending on risk of the proposed loan.
4. That deposit rates will start to drop.
5. That up to 25,000 mortgages will be deemed ‘unsustainable’ and that the ‘won’t pay’ contingent of arrears cases may be as high as 1 in 5.

We hope you enjoy this report, we in turn hope that we get some of the calls right!

Many thanks,

Irish Mortgage Brokers

This is the usual update of rates available at the moment. As you’ll notice, AIB is the leader in almost every section. However, they are not necessarily lending to every client hoping to obtain finance with them - to know if they’ll be the lender of choice you need to construct the application in a manner that will ensure it shows the best aspects of the case to them.

There are lots of other lenders out there too (we deal with the pillar banks and many others as well), so looking at ‘best rate’ is perhaps different than ‘best attainable rate’.

Anyway, here is the list, if you ever want mortgage advice give us a call! 016790990

Best variable rate mortgage: AIB 3.24% (with one for 2.84% < 50% LTV)

Best 1yr fixed rate mortgage: AIB 4.15%

Best 2yr fixed rate mortgage: PTsb 3.1% < 50% LTV, otherwise AIB 4.65%

Best 3yr fixed rate mortgage: AIB 4.88%

Best 5yr fixed rate mortgage: PTsb 3.7% < 50% LTV, otherwise its AIB 5.35%

Best 10yr fixed rate mortgage: n/A 12/2011

Oh, one final thing, AIB called everybody into a meeting at their head office about two weeks ago, the resounding message was that they are going to be lending more in 2012 but prudence will remain and prices will change (upwards to more comparable market rates).

The best rates in the market at present are

Variable (<50% LTV): BOI 3%

Variable (any LTV): NIB 3.4%

1yr fixed: AIB 4.15%

2yr fixed: NIB 4.2%

5yr fixed: NIB 4.9%

10yr fixed: NIB 5.5%

Our prediction that fixed rates would cease to exist this year is proving quite accurate, at the time we took quite a beating for making such a ‘drastic’ call in our Mortgage Market Trend Outlook report.

So far, PTsb have removed them and now Haven (and likely EBS) are set to do the same. We received notice today (see below)

The concern from a borrowers perspective is that we are getting to a point where you can’t fix a mortgage and you will be forced to ride the rate hikes that banks come up with including any that come from the ECB.

HAVEN FIXED RATE UPDATE

Due to ongoing increases in the cost of funds we will be temporarily
withdrawing both new and existing business mortgage fixed rates.
Significant movements on financial markets have resulted in fixed rates
which would not deliver value to customers at this time.  This position
will, of course, remain under constant review.

PIPELINE IMPLICATIONS

New business loan offers will be honoured until close of business Monday
28th February 2011.  Any case not completed by Monday 28th will be subject
to an amended offer for acceptance of the applicable tiered variable rate.

For existing customers, all fixed rate offers will be honoured until close
of business Friday February 18th 2011.  In each case Haven must be in
receipt of a Fixed Rate Mortgage Conversion form by close of business
Friday 18th to secure the application of a fixed rate term.

We were really pleased to feature on TV3’s ‘Morning Show’ with Sybil and Martin (Brian was standing in for Martin) in a conversation about property prices and whether or not we have hit the bottom. Aoife Walsh from the Respond! Housing Agency was also there giving some great information and advice for borrowers in trouble.

At the moment in Ireland there is a conundrum for first time buyers: should you buy now and potentially over-pay on purpose?

It’s an unusual one and it partly related to property prices, it is a combination of taxation changes that will occur from the start of 2012 and expectations of interest rate changes from both banks and the ECB.

The argument of ‘rent or buy‘ is well established, we produced report on it with Peter Stafford (now of the IAVI/SCS) and Frank Quinn of Senior College Dun Laoghaire, but this is different - buy now or buy later isn’t taking the default of renting as an assumed continuous option, rather it is a case of delaying for the sake of market timing.

The changes in tax are on the tax expenditure side, namely TRS (tax relief at source).

Currently it is applicable to a maximum of €10,000 p.a. and the rates applicable are 25% in year 1 and 2, then 22.5% in year 3, 4 and 5 then 20% in years 6 and 7. That is set to change from 2012 whereby the maximum applicable amount of interest will go down by 70% to €3,000 per buyer p.a. with a rate of 15% being applied.

The second issue is about rates, today the papers carried a story stating that PTsb would hike their variable rates by a full 1% and our Mortgage Market Trend Outlook 2011 predicted a 1% increase in variable rates with rates to rest at or north of 5% by 2012.

Then you have the ECB who may well enter the scene as well, they tackle headline inflation as opposed to core inflation and the issue with that is when you have things like rising oil or other commodity prices (currently a large part of the reason Egyptians are overthrowing their government) it causes inflation which they then must address with their single mandate. The Federal Reserve looks at core inflation (then strips out even more to make everything appear rosy!) and has a general economic and now a price target remit.

So with all of these things factored in you might find the following scenario.

Buy today and your mortgage is €200,000 (which will get you a 3 bed semi in any city now)
with a fixed rate of or wait until 2012 for a 10% price drop and do the same thing a year later using a mortgage
of €180,000.

Both terms are going to be calculated over 25 years we’ll take a 5 year fixed in both examples so for the 2011 mortgage we’ll go with 4.39% and the 2012 one will be 5.7% which factors in about a 1% from the Irish banks and 25bps from the ECB.

Gross Costs: 2011             2012
Mortgage        200,000        180,000
Rate                4.39              5.7
Term               25                 25

Monthly         1099              1126

That is already a compelling comparison from a cost perspective but then look at the Net figure when you factor in TRS

2011 mortgage: 200,000 x 4.39% = 8780 x 25% = 2195 pa which is 183 monthly
2012 mortgage: 180,000 x 5.7% = 10,260 but the cut off is 6,000 so it’s 6,000 x 15% = 900 pa or 75 monthly.

The bigger the mortgage the bigger that difference becomes, and inversely the smaller it is the smaller the divergence, but compare net figures now

Net Costs: 2011             2012
Mortgage       200,000        180,000
Rate               4.39              5.7
Term              25                 25

Monthly         1099             1126
TRS                183               75

Net Cost    €916pm        €1,051pm

That’s 135 per month! And that will continue because when we called revenue to research this they confirmed that the person starting on TRS in 2011 will be on the old system (25% yr 1,2 etc) and the person from 2012 will be on the new one for the duration of TRS - which will end in 2017 entirely. The buyer from 2013 gets ZERO!

So it is vital to consider this if you are thinking of buying and not sure whether to buy now or hold off. Do the sums, it may be best to wait, it may be best to move now but you have to know so it is well worth a few minutes with your consultant here to work this out!

We were delighted to be part of TV3’s ‘The Morning Show, with Sybil & Martin‘. We are fans of the show and enjoy the relaxed nature of the conversational commentary style they are so adept at. In this clip we spoke about the costs of finance and the potential removal of fixed rates, while Marian Finnegan (of SherryFitzgerald) covers housing, her background is in urban economics and she lectured at both NUIG and UL before moving to SherryFitzgerald. We hope you enjoy the clip.

O.k. I lied, they care, but when it comes to new lending (and the secular trend that has already started in Irish lending rates) the underlying prices is of secondary concern as long at the loan (which is the banks asset) is performing.

There is a disconnect between the way that consumers think of property and the way that financial institutions think of it, the consumer thinks of price, the financial thinks of long term loan value. They are two different things, take the example below

Property price: €200,000
Loan (90%): €180,000
Term: 30yrs
Rate: 3%

Total Cost of Credit: €273,199
Credit Cost: €93,199

The bank have a buffer in terms of the quality of the underlying asset, but that isn’t of concern, as long as the loan is performing it will be valued at €180,000 (or whatever the balance is), which is why the lenders are instead going for a different approach. Values have dropped to the point where they believe that we are somewhere near the bottom, not there yet but equally not at the wild over-valuation stage either, if they underwrite strongly, and only lend to the best candidates then the property prices can fail and they don’t need to fear impairment.

Once the borrower continues to pay there is no impairment irrespective of the underlying asset value. The second wing of this is to find margin in lending, we reported in early 2010 that rates would go up this year by 100 basis points or 1% starting in the first quarter, this has turned out to be true, if they go up by a further 50 basis points next year and prices go down 10% look at what happens.
Property price: €180,000
Loan (90%): €162,000
Term: 30yrs
Rate: 4.5%

Total Cost of Credit: €295,498
Credit Cost: €133,498

The lender has made an additional €40,000 on this loan even though the property price was less - because the credit gain outweighs the difference. Consumers often confuse price with cost, the smart thing to do would likely have been to take out a loan in Q4 of 09′ or Q1 of 2010 - if you believe that over the long term that the property will increase in value, if you don’t believe that then stay out of the market. The ECB might stay at 1% until 2012 according to some commentators, even if that happens rates are still going to increase as banks look for ways to find profit to fill the ongoing holes in their balance sheets.

Which is why they don’t care about property prices for new lending, rather they care about the financial strength of the applicant and about how much margin they can obtain on lending to new applicants.

There is concept in finance of a ‘risk free rate’, and normally that is seen as being the rate of return on money by a sovereign entity (in our case it’s Ireland), so in a rational market it should always be the case that anything with an implicit state guarantee should pay far less than those without it, because those without it have to reward investors by offering more in order to attract them.

Oddly, in Ireland the institutions implicitly backed by the state are actually paying over the odds, and in effect that means a transfer is occurring from tax-payer to depositor, in short, we are being ripped off when our sovereign guarantee is not factored into pricing.

For example: Anglo Irish Bank are paying 3.1% for a demand account, this means you can take your money out whenever you want, BOI, AIB, INBS, NIB and many others are paying a mere 0.1% meaning that Anglo are paying a full 300 basis points or 3% more than competitors who are not state owned (albeit they are partially state owned). Rabo are paying 2% so what we are seeing from a deposit account perspective is that Rabo are a better institution in terms reliability than our own state is.

What a joke…. But it’s not so funny really.

Then we have An Post, an implicit state guarantee and you can lodge up to €120,000 with them and earn a TAX FREE rate of 3.23%, normally you’d have DIRT which would take 25% away from any deposit gains, but in this case you don’t, so in order to earn the equivalent elsewhere you would have to be making 4.31%. Again, this is an example of paying way over the odds for funds, the state should in fact be offering well below market rate levels of interest because their return is guaranteed in a way that no other institution can copy.

Are you angry? Don’t be, just make sure that you buy An Post savings bonds and instead make some profit on the errors made from on high, as a financial adviser I can’t believe this continues and nobody is pointing it out, in the USA bond income from Municipal Bonds is tax free, so you always make a ‘tax equivalent yield’ in which you show how much you’d have to make on a taxable bond in order to generate the same income it is as follows:

R(te) = R(tf)/(1- t)

Where: R(te) = taxable equivalent yield for the investor
R(tf) = return on tax-free investment (usually a municipal bond)
t = investor’s marginal tax rate

Bond income is taxed at your own rate of tax, we’ll assume that you had a good year and are on the marginal rate of 41%, and see what kind of yield you would need from any other bond to earn 3.23% after tax.

R(te) = 3.23/(1-.41) = 5.47%

So if you were to go out and buy a corporate or sovereign bond you would need to be earning 5.47% in order to just match the offering by An Post, and you wouldn’t get a return like that which is backed by a sovereign guarantee! (exception is perhaps a Greek bond).

So why are we paying so far over the odds?

That’s a question, I certainly don’t have the answer.

Primetime took a look at the mortgage market situation in Ireland on the 2nd of February, they spoke to various industry experts as well as people on the street about their feelings on the situation. The clips below are well worth watching.

In this clip Primetime spoke to people on the street, and the general opinion was one of empathy for borrowers in trouble but the overall tone was that people didn’t necessarily want to step in and have their tax money going to bail them out. Then David Murphy interviews an anonymous borrower who is in debt trouble, as well as getting the opinion of Irish Mortgage Brokers Operations Manager Karl Deeter and Paul Joyce of the Free Legal Aid Centre (FLAC).

In the second video Pat Farrell of the IBF (Irish Bankers Federation), Stephen Kinsella (Lecturer of economics at University Limerick, and author of ‘Ireland in 2050), Pauline Blackwell of FLAC (free legal advice centre) and Ciaran Cuffe of the Green Party talk to Miriam O’Callaghan about the issues of debt and the solutions for solving impaired mortgages.

The third clip looks at the effects of interest rates as well as the PTsb decision to increase their interest rates, featuring David Guinane of PTsb talking to an Oireachtas Committee. Charlie Weston of the Irish Independent newspaper (personal finance editor) also features.