Getting a mortgage can be stressful at the best of times. Add a pandemic and things ratchet up. Whether you are applying for a mortgage or have signed contracts for your new home, there are some of Covid-19 complications to watch out for.
A question of Covid-19
“Have you been impacted by Covid-19?” It’s not just the doctors who want to know. If you are looking for mortgage approval, you have loan approval and are househunting or you have a loan offer and want to sign contracts, the bank wants to know. The question relates to your income, not your health.
"If you say 'No', they are looking for your April payslip to prove that you are not getting the Government wage subsidy," says Michael Dowling of Dowling Financial. "If you say 'Yes', then some are withdrawing loan offers and approvals in principal."
He says the approach of lenders is inconsistent, with some banks withdrawing full stop. Others are showing latitude. “They are taking the view that this is a temporary situation and you will be back at work at the same pay level – show us that payslip and we will honour the offer.”
With some 591,000 people receiving the Government’s special Covid-19 unemployment payment, there will be many whose dreams of a new home are put on hold. “It’s very upsetting for people, particularly when they feel that being on the scheme is a temporary situation.”
The Banking and Payments Federation of Ireland (BPFI), which represents the lenders, says they are required by the Central Bank to ensure that borrowers can afford the loans they take out. This is why borrowers are asked to prove they can still afford the mortgage.
It's not bad news for everyone, says Trevor Grant of Affinity Advisors and chairman of the Association of Irish Mortgage Advisors.
“Recently I had a couple where the husband had his hours cut in half but, between the two of them, they still qualify for the loan amount.”
In another case, both had reduced hours but their substantial savings were taken into account. “But you absolutely have to declare or prove that your income hasn’t changed prior to closing,” says Grant. “If there is a problem, get it out there early so that you have time to get it resolved.”
Sale aggrieved
Buyers who have already signed contracts with a seller but whose incomes have subsequently been hit by Covid-19 are suffering most. One couple had signed contracts and paid the €32,500 deposit for their €325,000 new home. The income of one of them, who worked in construction, has been impacted by Covid-19.
“They were ready to get the keys and move in next week and the bank rang to ask if they had been impacted by Covid,” says Dowling. “They were told they were not getting their mortgage.”
Borrowers in this situation need to have a good solicitor, advises Dowling. “Hopefully that solicitor will be able to reach out to the seller and explain the position.”
However, with contracts signed, not only is the seller not obliged to return the deposit, but they may also be able to sue the couple for the difference in price should the house later sell for less. “It’s a horrible situation. You have people saying this won’t happen, but it is happening.”
Shifting valuations
Covid-19 has seen economic prospects plummet in days. But without hard data from sales, it’s hard to see, at least yet, the actual impact on residential property prices. In certain cases, properties are now being valued at up to 10 per cent less than they were four weeks ago, say some brokers.
If you’ve signed contracts on a house at one value but the bank says it will only give you what it says it’s worth now, this matters. A professional valuer, chosen by the bank, carries out valuations.
“In a four-week period, no one can know what percentage things have fallen by,” says Trevor Grant. “It’s very unfair and unreasonable and I don’t really see how it can be measured so soon, or how they could risk a customer’s capacity to buy a property.”
When queried, those banks that did respond said the matter was one for valuers.
Bank of Ireland says existing valuations remain valid for current drawdowns if they are within four months of the date the valuation has been carried out. It says it has “not seen evidence to date of changes in property valuations due to coronavirus, although some valuers have chosen to add a Covid-19 caveat to their valuations”.
KBC Bank says professional valuers determine the valuation, but they “continue to monitor all metrics associated with market dynamics at this time”. The bodies representing valuers say though they are adding a Covid-related clause to valuations, they are not altering values based on the virus.
"There is no difference in valuations today than there was pre-Covid because there is no evidence to prove there is a difference," says Pat Davitt, chief executive of the Institute of Professional Auctioneers and Valuers (IPAV). A valuation is valid for four months and one done within that time frame still stands. Where four months has elapsed, the property can be revalued.
For such revaluations, IPAV valuers now add a clause to their valuation saying “with a small number of property transactions, the bank should get the property reassessed again in six to nine months”, says Davitt.
For new valuations, valuers can only go on sales prior to Covid, he says. “They can’t guess that Covid is going to have an effect on the property. They can’t value into the future.”
Transactional evidence
Society of Chartered Surveyors Ireland member and head valuer at Sherry Fitzgerald Colin Smyth says that without transactional evidence to say otherwise, values haven't changed since Covid-19. Valuations are based on comparable sales in the months prior. Where the four months has elapsed, more recent comparables are found.
But valuations now include the clause “the comparables used, transacted and closed, are prior to Covid-19 restrictions”. He wonders if some valuers have misinterpreted banks as, “you’ve got to knock something off this, just because”.
“I would be getting my intermediary to ask the bank how do they know my property is worth 10 per cent less than it was a month ago? I’d be looking for a second valuation too,” says Grant. “I would be aggressively dealing with this and I’d be getting my solicitor involved.”
Buyers who find themselves backed into a corner could try going back to the selling agent. “Tell them, ‘I bought the house in good faith, I signed a contract, I’m not going to be able to complete, the bank is telling me this house is now worth 10 per cent less than I paid for it, so I need to get the vendor to accept that and negotiate with me on price.”
While the Central Bank says it has no role in this area, it says EU regulations require that banks use reliable standards from accredited bodies when valuing properties.
If a borrower is unsatisfied with how a bank is treating them, complain to the bank directly first, the Central Bank says. “If they are still not satisfied, they can refer the complaint to the Financial Services and Pensions Ombudsman.”
Of course, the house you wanted to buy will likely be long gone by the time you get through that process, even if it finds in your favour.
Buying off plans
Up to 24,000 residential units were forecast to be completed this year, according to analysts at Goodbody. But with building sites closing at the end of March, start dates, let alone completion dates, are likely to slip. For buyers who have put a booking deposit on a home yet to complete, it’s a worrying time.
Take a buyer who signed a contract in January for a €300,000 house, paying a €30,000 deposit. If the house does complete by December as planned, but prices have dropped, the buyers could be left short in the mortgage a bank will advance.
“The bank’s valuer carries out a final inspection to make sure the house is finished and to confirm its current value, says Michael Dowling. If house prices have fallen by 5 per cent for example, its value will now be €285,000. “You’ve signed a contract to buy it at €300,000 but the bank will now only lend you 90 per cent of €285,000, because the bank lends 90 per cent of the purchase price or valuation, which ever is the lesser of the two.”
In this instance, the buyer will have to come up with an extra €15,000 themselves to bridge the shortfall, not easy for a generally already stretched first-time buyer.
Talk to your solicitor now, advises Dowling. “See what can be done in relation to your contract. I do believe there will be significant problems for first-time buyers whose properties won’t be ready for months and months.”
If there is a delay in the completion of your house, likely to extend beyond your mortgage approval term, “your lender will work with you to facilitate this as much as possible”, says the bankers’ group BPFI. However if you have concerns over a deposit, it’s your solicitor you need to talk to, not them, they say.
Exemptions
If you were due to receive a mortgage exemption or were hoping to get one, don’t bank on it now. Under the Central Bank mortgage-lending rules, the maximum a person can borrow is 3½ times income. Lenders are permitted to give mortgages of no more than 80 per cent of the value of a property, rising to 90 per cent for first-time buyer.
However, lenders also have the discretion to breach the rules for 20 per cent of its mortgage book, as long as they are comfortable that a would-be borrower has the capacity to repay the loan in the agreed time frame.
Some lenders have already started restricting exemptions as a result of the Covid-19 crisis. KBC says it is suspending exemptions on new mortgage applications only, effective from April 24th. Ulster Bank has paused exemptions on all new applications from April 9th. Bank of Ireland has suspended new exemptions also. AIB says it is keeping its lending criteria under constant review but hasn't changed its position on exemptions yet.
Mortgage approval extension
If you have spent years saving and collating documents to get mortgage approval in principle, can you get an extension on that approval as you wait and see how house prices weather the virus? The BPFI says “Yes” – you can probably extend for three to six months, but only if your income hasn’t been hit by Covid-19 and if your lender is happy to do so. That’s a significant number of ifs.
After the extension, the lender will review your application, asking for an update on your employment or income situation.
New mortgage applications
If your new year’s resolution was to buy a house this year, you may wonder whether it is now wise – or even possible – to do so. Would-be first-time buyers will have spent recent years scrimping and saving to get their bank statements in order. Those whose income is impacted by Covid-19 may now have a wobble in their earning record, and may be forced to eat into savings earmarked for a deposit, pushing them further away from their goal.
If your financial situation is unchanged by the pandemic and you want to get things in train to buy, the banks are open for business they say. Some may not be lending as much as before, however.
