How to fix Ireland's mortgage market
'New lenders have more efficient systems but the legacy lenders are lagging behind.' Picture: iStock
With mortgage completions to finish 2021 at €10.5bn and set to rise to €14bn in 2023 and €17bn in 2025, one could suggest there is nothing wrong with the mortgage market but there are a number of items that need to be changed and reviewed.
The Central Bank is currently engaged in a consultation process to review the rules introduced in 2015. Uniquely, in a global context, we have LTI (loan to income) and LTV (loan to value) thresholds which apply which have not been changed since their introduction in 2015.
A “revolution” occurred in our market in October when two lenders, Avant Money and Finance Ireland introduced 15 to 30-year fixed-rate mortgages at sub 3%. The introduction of these long term fixed rates dispels the fear the Central Bank has had about making any adjustments to the rigid LTI and LTV rules. In fact, only the UK and Denmark out of all the 27 EU Countries apply this method to determine what you can borrow.
In the UK, the LTI is 4.5 times salary whereas in Denmark it is four times. We need to move to debt to income DTI or debt service to income DSTI model.
As a simple example, a single person earning €50,000 can get a maximum mortgage of €175,000 under DTI rules, using 35% of net income, the borrower can borrow €210,000 and get a 30 year fixed rate of 3.1%. Using 40% of net income gives a mortgage of € 240,000. The Residential Tenancies Board reported in July that the average tenant paid 36% of their net income on rent.
All lenders struggled with service in 2021 and while there are signs that some lenders are improving, borrowers and brokers should be getting better service from their lenders. The problem is that all lenders have their own proprietary systems and some have not changed in 20 years. You have the farcical situation of some lenders looking for pages and pages of documentation being scanned to them to input the information to start the process of underwriting the mortgage.Â
The new lenders have more efficient systems but the legacy lenders are lagging behind. The days of lenders launching their own systems are long gone, shared services is the way forward.
With the advent of the Central Credit Register in July 2017 by the Central Bank, lenders have excellent credit information on prospective borrowers. All lenders require six months of bank statements as part of the documentation to process a mortgage, why? It should be reduced to three months as coupled with other supporting documents, banks have more than sufficient information to make an assessment of the borrower's ability to pay.
It is very encouraging to see that two of the new lenders to the market, Avant Money and ICS Mortgages do not require mortgage or loan statements and Avant Money do not require Credit Card statements either, why is this? Very simply because the information is on the CCR. All lenders should adopt this approach. The service proposition must respond and respect borrowers and brokers. In 2021 it did not.
2022 must be the year that cashback incentives are removed from the market. We know they are worth 0.4% in terms of an interest reduction to the consumer, a saving of €63 per month over 30 years on a mortgage of €300,000 or €22,680 over the 30 years. The legacy lenders must compete on price and service.
All markets need competition as does ours. We are losing Ulster Bank and KBC who had a 26% market share. While this creates new business opportunities for the existing eight lenders, three are owned by AIB. There is room for new players. Competition is healthy. The three newest entrants to our market have the cheapest interest rates and do not offer cashback. Two of these lenders, exclusively offer 15 to 30 year fixed rates.
Michael Dowling of MD Dowling Financial is a leading mortgage and debt adviser
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