Borrowing warning - First-time buyers face tough times

WITH the first three months of this year barely gone, the worrying trend in house prices is continuing relentlessly.

It may be good news for those whose interests lie outside the second-hand property market, but it is an exceptionally gloomy outlook for those aspiring first house buyers.

There is also the strange dichotomy of the Financial Regulator warning banks to cover themselves against borrowings, while estate agent Sherry Fitzgerald reports house prices are up by 7.6% in the first quarter of this year and will remain buoyant.

The regulator’s warning was prompted specifically because of possible mortgage defaulters.

The total debt outstanding amounts to €268 billion, half of which is owing from household accounts. Last month alone, for example, consumers and other borrowers took out an additional €5.6bn in loans.

It is hardly surprising, as interest rates are poised to rise again, that Financial Regulator Patrick Neary felt it necessary to fire a pragmatic shot across the bow of mortgage lenders.

The message, which should be taken on board by borrowers of 100% house capital, is that borrowers may not be able to repay their loans and the providers must now set aside more funds to make sure they are covered by that eventuality.

Although the mortgage market remains strong and profitable and there are no signs of any weakening in demand, the regulator is being provident in believing that it is now appropriate for lenders to provide for the additional capital to cover mortgages where the size of the loan exceeds 80% of the value of the property.

However, where this measure will have the greatest impact will be on lenders with a high proportion of first-time buyers.

And while it may be described as a cushion for the future, it is a comfort zone for the banks who will more than likely pass it on in the form of higher interest rates.

In line for that added expense will be first-time buyers who take out 100% loans and who already pay higher interest rates than first-time buyers who also use their own savings.

The European Central Bank (ECB) is due to meet on Thursday, and it is expected to increase rates over the next few months, which will invariably be passed onto borrowers.

Before the year is out, it is anticipated that interest rates will increase by a further three-quarters of percentage point.

The Sherry Fitzgerald figures show that the introduction of 100% mortgages, with the elimination of stamp duty, has significantly fuelled price inflation for the starter home end of the second-hand market.

Another factor which buyers who need a roof over their heads have to contend with is the competition from investors who are relatively active this year.

They accounted for about 20% of that market so far this year, which is slightly higher than last year, and are still a major factor which less well-off buyers have to face.

Inevitably, higher interest rates dictated by the ECB in addition to the move from the Financial Regulator will help to restrain the second-hand housing market, because money will be harder to borrow.