Bank of Scotland cut back on LTV's

Bank of Scotland recently announced that no longer will support an applicant seeking to borrow 90% for a newly constructed, or second hand property.

In view of the new homes gathering market clearing pace, I feel Bank of Scotland have been a little short sighted here. This profile of the property market accounts for a huge amount of business, especially with builders seeking to offload newly built properties at knock down prices. I don’t think I am being short sighted when I predict fervent activity over the coming months with many first time buyers eyeing dropping prices as an economical godsend, match that with a low rate environment and it gives mobility, choice, and all of this at a price that won’t break the bank.

Paying € 1,100 / € 1,200 for a 2 bed city centre apartment makes sense for people who don’t wish to live with their parents. If we move this on a step further, it makes even more sense to buy. With very low lending rates, you can get a mortgage for less than this amount per month, especially in light of the fact that the Government have kept faith in the First Time Buyer market, illustrated perfectly by the continued investment in the First Time buyer TRS scheme. In case you weren’t aware, this provides financial support to First time buyers for the 1st 7 years of their mortgage. This is a genuine and very welcome offer, if you consider recent tax hikes/ reduced governmental investment. It does prove that the Irish property whilst crippled is still a viable option for many young Irish people.

So why have Bank of Scotland made this dramatic move to only offer 80% mortgages? Realistically, it prices many First Time buyers out of the market as they have to cough up 20% of the market price. Between renting and saving, it really means a deposit of around € 50,000. The only rationale I see is that Bank of Scotland are of the opinion that property will continue to drop in value, hence the property they have security dropping in value.

The 2 largest banking groups in Ireland; AIB & Bank of Ireland have not bought into this and continue to support the home owner market by offering “above 90%” mortgage packages for first time buyers at great prices, that is their way of ensuring that after they were helped by the tax payer that they get money to tax payers who need it in order to purchase their own home.

If anything, property transactions are currently under priced, meaning that many properties are currently sold below their market value. This isn’t ‘random value’ but on valuations based on price per square metre averaged over entire estates, in other words: not ‘vendor’ based prices. Why is this?

Firstly, as this applies to the newly constructed market, some builders have found themselves under huge financial pressure and as such have elected to shift properties in an effort to keep their debtors at bay. If anything you can buy a property at a slightly undervalued price.  Joe Builder in the current depressed market can only sell at a below par price, and therefore the First Time buyer has the opportunity to get a real bargain, worst case scenario, the purchaser gets a great deal, the bank have a more favourably weighted asset and the builder finally gets to pay off his new Mercedes 500sl.

The second hand market is largely dictated by the occupant in the house… is there enough equity to sell and move on, is there mortgage more than what the house is worth?

This value is nearly pre determined by these factors, and simply ratified by an Auctioneer/ Valuer who comes to value the property on behalf of the lender. Throw in market demand and you have the value, so why wouldn’t a bank support this applicant for 90% of the value if it is a true valuation?

I understand that “Loan Book” considerations are paramount as far as a bank are concerned, but property has be known to fluctuate over time, so that outlook is inconsistent. They weren’t lending 120% mortgages in the better times, so why do the reverse?
This post was written by Keith Sheeran, a mortgage specialist with our firm, if you would like to contact Keith you can reach him on 01 673 0418 or email him at keith dot sheeran at mortgagebrokers dot ie. Keith has been specialising in mortgages for nearly a decade.

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