Mortgage lending has gone mad

Carb

I happened to watch "I am Adult, get me out of here" last night. I just couldn't believe it when I heard that the nurse on the programme, earning <28k, got formally approved for a mortgage of €250,000. This was achieved because one financial institution takes into account future pay rises that nurses get after different years of service. I have heard of a little flexibility with the likes of part qualified accountants who were going to qualify in the next 12 months or so, but nothing like the figures mentioned above. I thought mortgages had to be based on current circumstances. I know nurses, guards etc have set salary scales, but thats hardly much good if you run in financial difficulty in 2 years time. What next, are they going to start allowing for 2/3% rises per annum in everybody's salaries when determining your borrowing capacity. Where will this lunacy end.

When I went looking for a mortgage, I owned a site worth approx 80k, was building a house that most people estimate will be worth 450/500k, I was a part qualified accountant which meant a large future pay rise, and my wife and I had joint incomes of about 55k, and still our bank didn't want to give us 200k.

BTW, the nurse didn't take the mortgage as she got an affordable house.

chuckles30

I know a teacher who was approved for 250k as well and she has no deposit saved. She's only a couple of years qualified, but again because they're guaranteed payrises etc they seem to get way higher mortgages. I had my deposit saved, and got 150k, but was limited in my options as it was too high for some of the banks etc. Still I'm happier with my smaller repayments.

lazygit

my wife and i have a joint income 90k, we have a depost of 25k, 2 SSIA's and 40k in a post office savings account.. we had to BEG for 310k.. and my wife is a teacher.

sapper

With those numbers you should easily be able to get 450K these days...

layke

I wonder how people can afford housing at all with the prices.

After enquiring I got approved for €150k on my own with AIB, at the time I was on 25k. Just where the hell are you supposed to find a house in Dublin for 150k?

conor_mc

layke wrote:

I wonder how people can afford housing at all with the prices.

After enquiring I got approved for €150k on my own with AIB, at the time I was on 25k. Just where the hell are you supposed to find a house in Dublin for 150k?

People never could "afford" houses. They could though afford their monthly mortgage repayments.

Unfortunately, the banks are pumping money into the system by offering greater LTV's, longer terms, higher multiples of salary, all combined with historically low interest rates, therefore reducing the monthly repayments and giving the false impression that houses remained "affordable" to most.

kluivert

Agree with the last month theres a big difference between repayment on a 35 year mortgage of 300k than compared to 25 year.

Captain Trips

lazygit wrote:

my wife and i have a joint income 90k, we have a depost of 25k, 2 SSIA's and 40k in a post office savings account.. we had to BEG for 310k.. and my wife is a teacher.

90k in PermanentTSBs calculator will give you around 400 grand without any haggling. Were you getting a mortgage from Bank of Ye Olde Ireland

dunkamania

Got 240k on 20k salary last year:)

galah

how on earth are people paying these monstrous mortgages off? These must be 40 year mortgages or something...There can't be much money left after the monthly repayment...

It truly baffles me...

Eoin

Carb wrote:

I happened to watch "I am Adult, get me out of here" last night. I just couldn't believe it when I heard that the nurse on the programme, earning <28k, got formally approved for a mortgage of €250,000.

Going by this site, her mortgage repayments (35 years with a tracker mortgage) would be about €1050 per month. Tax relief may bring that down to around €950. Her take home pay should be €1860 per month (not including pension payments).

Even if she has no loans or other outgoings, that would leave her with about €900 a month to live on. Not easy, and that's not even including furnishing the place.

Still though, if you bring the salary up to 35K, monthly take home goes up to €2200, so that gives more of a comfort zone.

Tazz T

kluivert wrote:

Agree with the last month theres a big difference between repayment on a 35 year mortgage of 300k than compared to 25 year.

Yeah, the bank makes around 110,000 in interest payments extra out of you over those extra ten years.

Taking out a 35 year mortgage isn't wise money management.

Enii

In "I'm an adult...." was the nurse getting more money because the bank was taking into account that she was going to let a room out, he said she could get more if she bought a 3 bed house. Maybe her father was also going guarantor so this would also make the banks give more money.

shoegirl

Carb wrote:

What next, are they going to start allowing for 2/3% rises per annum in everybody's salaries ...

Be warned that IT salaries have stagnated or fallen since 2001. Its only ever going to apply to the public sector, where pay increases are a strong likelihood.

PS Its not unrealistic: I got no pay rise between 1997 and 2000. 0%. Null points.

garred

Maybe, just maybe its not the banks fault. People can make decisions on their own on what they can/cannot afford. Maybe, just maybe the banks are doing what any company would do, developing with the times. Mortgages hav'nt gone mad, house prices have and banks are tailoring lending agreements that suit/meet these times we live in.
Driving into a test centre, failing your test and being certified incompetent to drive our roads and then being allowed to drive out of the test cente. Now thats mad.

Carb

garred wrote:

Maybe, just maybe its not the banks fault. People can make decisions on their own on what they can/cannot afford. Maybe, just maybe the banks are doing what any company would do, developing with the times. Mortgages hav'nt gone mad, house prices have and banks are tailoring lending agreements that suit/meet these times we live in.

Have you ever thought that perhaps house prices wouldn't keep rising at the rate they are, if people couldn't keep borrowing ever larger amounts. For years people could afford more due to falling rates, now they can afford more due to the increasingly ridiculous ways banks have of assessing how much you can borrow. As for people been able to make decisions on their own, I would guess that a lot of people are blinded in their race to get on the property ladder. In the case above, the person would have about 900 a month to live on. With this €200 per week, she would have to run her car, pay her bills, clothe and feed herself, not to mention actually furnish the house. Most houses now, probably come with a management charge equivalent to five weeks of her wages. Imagine what a 1 or 2% interest rate rise would do. The reason central banks and regulators set guidlines for banks lending is becasue of people's inability to decide what they can afford. Lending somebody over eight times their salary is absolutely crazy.

Eoin

Seems like a vicious circle to me. I have close to no knowledge of the property market, but what happens if people like this lady decide to rent and wait for house prices to come down?

If the house prices do drop as a result, then people might buy them up specifically to rent them out. This decreases the supply of houses on the market therefore the demand rises and the prices go up again. This is aside from the problem of paying money in rent that they can't reclaim.

conor_mc

eoin_s wrote:

Seems like a vicious circle to me. I have close to no knowledge of the property market, but what happens if people like this lady decide to rent and wait for house prices to come down?

If the house prices do drop as a result, then people might buy them up specifically to rent them out. This decreases the supply of houses on the market therefore the demand rises and the prices go up again. This is aside from the problem of paying money in rent that they can't reclaim.

Haven't seen a resurgence in tech stocks lately, have you?

Reason being that people got burnt, and tech stocks went out of fashion. The herd moved on to the next great financial wonder. There's a huge number of amateur investors who won't go anywhere near the property market after a bust. They'll bitch and moan about it for years to come, like they did with their misplaced punts on eircom.

There are still plenty of people who think pensions are a waste, because they know someone who got "shafted".... well, they didn't get shafted, they just didn't manage the latter years of their pension properly. Pensions are still a great vehicle for saving for retirement with the tax reliefs involved, but they're just not en vogue at the moment.

Carb

eoin_s wrote:

Seems like a vicious circle to me. I have close to no knowledge of the property market, but what happens if people like this lady decide to rent and wait for house prices to come down?

If the house prices do drop as a result, then people might buy them up specifically to rent them out. This decreases the supply of houses on the market therefore the demand rises and the prices go up again. This is aside from the problem of paying money in rent that they can't reclaim.

You are correct, but there are two vicious circles at play. The one that you mention, and the other one been that everytime the banks increase the supply of money, this transfers into the housing market, increasing prices, meaning that the banks have to increase money supply again. As yields on rental properties bought in recent years are so low, this would indicate that most investors are in the market for capital appreciation. If the scenario you mentioned above were too happen and house prices did start to fall, there would be a certain amount of investors who would sell up, thus increaing supply. Prices would have to fall a long way for rental yields to come into line, and with no sign of guaranteed appreciation, it would be a while before investors start snapping up these cheaper properties. As houses become more afforadble, some people would move from rental properties to buying their own property, thus taking pressure off rents and again stopping investors rushing rushing into the market. Thats the way I see it put in as simple terms as possible. I think there are enough houses been built every year to meet demand. The fact is there is an equilibrium out there, and it is not at 3% rental yield and prices at eight times somebodys salary. As a matter of fact, this woman went looking for a property and coudn't find one, even at eight times her salary. As long as banks keep dishing out the money, this situation will not correct itself. But of course, its not in the interest of banks for house prices to fall to a level that reflect the incomes been earned.

garred

Carb wrote:

Have you ever thought that perhaps house prices wouldn't keep rising at the rate they are, if people couldn't keep borrowing ever larger amounts. For years people could afford more due to falling rates, now they can afford more due to the increasingly ridiculous ways banks have of assessing how much you can borrow. As for people been able to make decisions on their own, I would guess that a lot of people are blinded in their race to get on the property ladder. In the case above, the person would have about 900 a month to live on. With this €200 per week, she would have to run her car, pay her bills, clothe and feed herself, not to mention actually furnish the house. Most houses now, probably come with a management charge equivalent to five weeks of her wages. Imagine what a 1 or 2% interest rate rise would do. The reason central banks and regulators set guidlines for banks lending is becasue of people's inability to decide what they can afford. Lending somebody over eight times their salary is absolutely crazy.

There are a lot of reasons why house prices are the way they are and not just available funds from lending institutes.
I'll put this to you with regard the example above, she does'nt buy the house. Crazy but would'nt it seem the logical thing. I'd love a 3 bed in Dublin but with repayments being a little excessive I look for somewhere/something that I can afford. A lot of people are availing of rent a room, etc to help with their mortgage payments.
You may think mortgage lending has gone mad but personally I think that banks are offering a range of options for people to get on the property market. Now if people take out mortgages without working out the repayments, possible future increases, etc that is bordering on stupidity and banks should not be blamed for that. Banks still have criteria that people have to meet and is it really their fault if people give false info when applying for huge mortgages that on paper they can meet but in reality cannot.

homah_7ft

garred wrote:

Banks still have criteria that people have to meet and is it really their fault if people give false info when applying for huge mortgages that on paper they can meet but in reality cannot.

Yes the banks are known for their clarity. I believe the central bank needs to step in but in this political climate that's never going to happen.

Pa ElGrande

A Leading Dublin Businessman told a judge yesterday he had fraudulently misled Irish Life Building Society into believing a woman worked for his hotel and earned €30,000 a year there.
Brian McGill, owner of the Harcourt Hotel in Dublin, said he had provided a fraudulent Certificate of Earnings to Catherine Fitzpatrick Butler so the society would provide her with a mortgage.
He was giving evidence in a legal row among former lovers.........
Read the rest at [registration required]

Hotel owner misled lender to help couple buy house
http://www.unison.ie/irish_independent/stories.php3?ca=9&si=1619754&issue_id=14096

This is not a unique occurance, several acquaintances of mine have over the years had a quiet word with the company accountant or owner and got a certificate for earnings higher than they actually made.
I am also aware of people who have been turned down for loans by banks/building soceity when applying directly, but when they have gone through certain brokers have managed to secure a loan, often for the institutions that refused them in the first place. Some of these people are so stretched, they have no scope to handle the impact of sudden unemployment or serious illness.

Carb

garred wrote:

There are a lot of reasons why house prices are the way they are and not just available funds from lending institutes.
I'll put this to you with regard the example above, she does'nt buy the house. Crazy but would'nt it seem the logical thing. I'd love a 3 bed in Dublin but with repayments being a little excessive I look for somewhere/something that I can afford. A lot of people are availing of rent a room, etc to help with their mortgage payments.
You may think mortgage lending has gone mad but personally I think that banks are offering a range of options for people to get on the property market. Now if people take out mortgages without working out the repayments, possible future increases, etc that is bordering on stupidity and banks should not be blamed for that. Banks still have criteria that people have to meet and is it really their fault if people give false info when applying for huge mortgages that on paper they can meet but in reality cannot.

At the end of the day, if the funds weren't available, people couldn't buy the houses at currrent prices. If lending reflected 4/5 times people's salaries, house prices would have to fall to this level. But why won't this happen, its because the biggest losers would be the financial institutions and property developers/government buddies. While house prices keep rising, there will always be this rush for everyone to get on the property ladder, and the banks will keep coming up with more ingenious ways to keep this vicious circle going. Since when did single people in their mid twenties need to own their own place, when they obviously can't afford it. People refer to rent as dead money, they'll certainly know about dead money when the housing bubble bursts.

As for the issue of false information when applying for a mortgage, it may be quite difficult for a bank to verify the details that a self employed person gives, especially when a friendly accountant is involved. But for an ordinary PAYE worker, the banks could easily verify the information, if they wanted to. My guess is that they'd rather turn a blind eye until they discover that the person in question can't afford the mortgage, and then they'll start looking for somebody to blame.

shoegirl

Carb wrote:

At the end of the day, if the funds weren't available, people couldn't buy the houses at currrent prices....

Correct. However, the ways in which funds are raised does not always involve the lender and lendee "conspiring" to borrow more. I certainly know that it is still the rage in Dublin anyway, to borrow the difference in a deposit from the credit union.

Carb wrote:

Since when did single people in their mid twenties need to own their own place, when they obviously can't afford it. People refer to rent as dead money, they'll certainly know about dead money when the housing bubble bursts.

Im my day it was considered quite normal to rent into your 40s or stay at home with the ma. I do notice however, a lot of younger people who in fairness have seen only really extortionate rents, desperate to own a house before they are 30. In many cases, they are fresh out of college. But also, they have jobs - and often good money, which we did not have in the 80s and early 90s. To a large extent they are looking for houses earlier because they can afford it, and have absolutely no hope of social housing or cheaper rents. You have to remember that back in the 1970s about 75% of the population lived in social housing of some form. And where I am from (Swords) it was quite normal to live in social housing even if they were in a reasonably ok job: about half of the kids I grew up with lived in social housing - but most did come from "working" backgrounds, where now the vast majority of people getting social housing, and large proportion of those who don't - are totally dependent on social welfare. Now only has this made social housing much more difficult to get, its also made it much more unattractive for many people as they don't want to live in areas perceived as "poor". That is not to say that there are still lots of people who would love to get housed!

Carb wrote:

As for the issue of false information when applying for a mortgage, it may be quite difficult for a bank to verify the details that a self employed person gives, especially when a friendly accountant is involved. But for an ordinary PAYE worker, the banks could easily verify the information, if they wanted to. My guess is that they'd rather turn a blind eye until they discover that the person in question can't afford the mortgage, and then they'll start looking for somebody to blame.

There always was a culture in self-employed circles to cook the books when applying for credit, partially because it was much more difficult a few years ago to get credit if you weren't in the PAYE sector.

I do think that the current bubble is being drive by high demand pure and simple.
1. First there are demographics - large population boom of 70s and 80s now in their adult years, plus lots of similarly aged immigrants.
2. Traditionally very high rents in the private sector coupled with preferential tax breaks
3. Non-accessibility of the social housing sector to those non on social welfare.
4. Unfair competition with investors caused by preferential tax schemes such as section 21 and holiday home schemes.
5. Big fall in interest rates over a long period and high employment, plus big pay rises in the public sector.
6. Trends towards smaller families and singles living alone.
7. Easier availability of credit

It would take several of these factors to change to cool the overheating - not simply a change in lending trends.

TheBigLebowski

Jeez we haven't had this "house prices" discussion in at leat 2 days....will we ever tire of it?

Pa ElGrande

TheBigLebowski wrote:

Jeez we haven't had this "house prices" discussion in at leat 2 days....will we ever tire of it?

Everything has been said before, but since nobody listens we have to keep going back and beginning all over again - André Gide

People want to believe that the 'truth' is that house prices never really fall and that you are rich because of the equity in your house and that if you want to see house prices fall you are a 'doom-monger' and all round idiot and spoilsport. Economic common sense and reality has gone out the window because the power of the vested interest spin and mantra has made that common sense and reality invisible, or if visible has turned it into 'not true'.

ONE OF the two companies that specialise in arranging subprime mortgage lending claims to have done €350m in business since it set up a year ago. This product is filling a gap in a growing market made up of people willing to extend expensive credit to those so desperate to buy property they will pay well over the usual asking price.

But subprime lending is also an indicator of how the insatiable property machine finds ways to feed itself. We now have 100% loans and 40-year repayment terms extended to first-time buyers who could otherwise not afford repayments. At the same time, home owners are encouraged to take out equity-release loans, often to buy yet more overpriced property.

The market is so distorted by cheap credit and loose lending practices that unregulated foreign (and domestic) property promoters are selling individual hotel rooms in popular resorts where price inflation has squeezed out the traditional holiday-home buyer.

And now “land bank” sellers are popping up too, selling parcels of agricultural land that the promoters say “may” some day be rezoned.

Anyone tempted to pick up a few seaside acres of bargain land in Bulgaria, for example, might want to read up on the reservations being expressed by the European commission about the crime and corruption issues that still haven’t been addressed there in the run-up to their joining the union. Tread carefully — the local Tony Soprano might be at the other end of your deal.

Jill Kerby: Land bank property is hostage to fortune
http://www.timesonline.co.uk/newspaper/0,,2770-2199481,00.html

I do think one particular fundamental we should be directly challenging is the lending practices of mortgage lenders. As long as the lenders are willing to lend such large amounts of money to people the public will pay whatever prices are asked for property that the lending will allow them to purchase.