FIONA REDDANon the hunt for a family home

WHEN IS a property crash not quite a property crash? When the purchase price of properties falls but the cost of financing a purchase rises. It might seem a bit perverse to question price drops of up to 60 per cent, but unless you’re a cash buyer, then the rate of interest on your mortgage is almost as important as the price you actually pay for the property.

Consider this. The first time we went house-hunting, around 2004, we viewed a two-bed apartment in Clontarf, north Dublin. It was a fairly modest ground-floor apartment in need of updating, on the market for about €295,000. At the time, if we had bought it, we would have been looking at monthly repayments of less than €1,000 based on a tracker rate of about 2.0 per cent. Now you could expect to secure a similar property for €200,000 – if not less – but guess how much the monthly repayment will be on a rate of 4.5 per cent? A little over €900. So, there’s not much of a differential, despite a €100,000 price drop. And if you’d bought eight years ago you would have availed of mortgage interest relief – after December this will no longer be available.

So it might be a bit of a myth to say affordability has rocketed, when people are constrained not only by their ability to get a mortgage, but also to repay it. For us, it has been a slow realisation that the market is not as buyer-friendly as it first appeared.

If you’re looking for a home, one of the first things you’ll want to know is how much you can borrow. So you log on to one of the bank’s mortgage sites, use their calculator and come up with a total which is typically about 4.5 to 5 times your total income.

Great, you say, that’s better than I thought. Then, armed with this nugget of information, you go to some viewings to get a feel for properties out there. You chat with the estate agent, size up the potential for a vegetable patch out back or giant TV in the living room, and head home happy, looking forward to the next stage. Getting mortgage approval.

Here, however, is where many of us falter, as the bank starts to apply quite a different process to that which you saw online. It’s not about the size of your total income, but rather the amount of disposable income you have available each month in order to service a loan. Any outstanding expenses such as car loans, credit card bills etc, will reduce this, and therefore proportionally reduce the amount you can borrow.

At this initial meeting with the bank, the adviser – who is nowadays obliged to do this – starts talking about what will happen if you go into arrears on your mortgage. Not exactly an uplifting chat then, as you beat a sheepish retreat home.

Later, you might sit down and open your folder from the bank. A painful looking application will request attention, and avoiding this, you look instead at the mortgage rates the adviser has printed out. Here’s where you might get your first real shock: the cost of servicing your loan.

With the mortgage market largely held up by the two pillar banks, Bank of Ireland and AIB, a lack of competition combined with a desperate need for the banks to return to profitability means rates are now far higher than that set by the European Central Bank (ECB). If you’re not a first-time buyer, the cheapest rate you can now get from AIB is 3.8 per cent on a variable rate – compared with 4.4 per cent at Bank of Ireland.

This means, for example, that a modest four-bed in Dundrum with a kitchen extension that was on the market for €475,000 (which we didn’t even get to view by the way as it was gone quickly – the agent noting it went for “substantially more” than the asking price) would mean some sizeable repayments. On a mortgage with AIB, you would be looking at repaying almost €2,000 a month – or €2,150 if Bank of Ireland had given you the seal of approval.

And here’s the real crunch. We bought our first home back in the age of the tracker, and only a differential of less than 1 per cent separates us from the ECB rate. So is it wise to give up this closely matched tracker for a mortgage that will be locked into a difference of almost 4 per cent with the ECB rate? After all, while we might realistically expect another rate cut this year, after that it is feared that the ugly inflation word will rear its head again. And even a 1 per cent rate hike will shoot variable rates up to more than 5 per cent.

For us, the solution would be for the bank to allow us to sell our home and carry our tracker over to the new mortgage – or at least for the amount that is outstanding on the loan. This would substantially ease the burden of financing, and make trading up a far more attractive prospect. But they said no.

So it’s going to be a case of either staying put, or stomaching the fact that a house at the “knock-down” price of €475,000 will actually cost us at least €770,000 when the total cost of borrowing is factored in. Maybe it’s time to get more inventive about storing the Lego?