Liam Croke: Loosen loan criteria for good lending cases

A NUMBER of people in Limerick have contacted me over the last week who are looking to purchase a second property and who have been actively seeking to secure a mortgage to allow them to do this.

A NUMBER of people in Limerick have contacted me over the last week who are looking to purchase a second property and who have been actively seeking to secure a mortgage to allow them to do this.

From the scenarios that I’ve encountered down through the years, the reason they are looking for a second property is either: their current property is in negative equity and they are unable to sell and yet they still want to upgrade to a larger house or change location entirely. Or the asking price of properties has depreciated to levels so attractive that apparently buying a second property is an excellent investment.

Two sets of clients visited my office over the last few weeks – one was a couple and the other an individual – each of them fitted into the categories I described earlier. Both sets of clients had a number of things in common such as being permanently employed and earning good incomes. However, they now have one further thing in common: having their mortgage applications refused.

As I mentioned earlier these clients were in permanent employment with a good income - the couple with approximately €70,000 and the individual circa €50,000. Each set of clients have accumulated savings of around €25,000. Their repayment records are exemplary and apart from their current mortgages neither of them have any loans.

The couple’s existing mortgage has around €185,000 outstanding with a remaining term of 30 years. Their monthly repayment is €616 and they value their property at close to €100,000.

They want to move to a newer and bigger property that would cost them €150,000 as it is currently in Nama and similar properties were reaching €350,000 only five years ago.

This couple researched the rental market and discovered that their existing property is in an area much sought after where the demand for rental properties is quite high. It is expected that their property would be snapped up by willing tenants and would fetch €900 per month which would more than cover their mortgage.

The couple and I sat down and we compiled a comprehensive and detailed mortgage application. We specifically packaged it in a way that the underwriter – that is the person who assesses the application –could review the contents with ease. We included the “normal” items such as credit reports, bank statements and pay-slips and we even went beyond the normal by including extra documentation such as a valuation report on their existing property and rental opinion letters.

When a bank is assessing any application they base the amount they are prepared to lend on two criteria.

Income Multiples: This is a factor of multiplication of one or two incomes in terms of a couple to determine how much a client can borrow. I don’t understand why banks are still using this method because more often than not this practice bears no resemblance to the amount they are willing to lend. It is a crude way of providing people with an indication of how much they can borrow and is used with approval in principles that some institutions rave about by claiming “we will give you approval in principle in 15 minutes”. In my opinion they are probably not worth the paper they are written on and make no mistake they are only used by lenders in the hope that when a person gets one from them that they will stop making applications to other banks; they are used in an effort to keep that person. The trend worldwide with many institutions is a move away from giving out “approval’s in principle” but here in Ireland they are back in vogue.

Net Disposable Income: The second way of determining the amount a customer can borrow is based on what is called NDI - net disposable income - and this is the real way that banks determine how much they are willing to lend to you. They want to know that after the mortgage repayment - which is stress tested by somewhere between six and seven per cent, depending on the lender - and any other loans that there is a minimum amount left in your account that can be used towards living expenses.

In principle, this is fine, it just depends on the limits they set. For example some lenders might set a limit for a single person that there should be circa €1,400 left in their account after their new mortgage is repaid. That might be a very small amount after the mortgage is stress tested at seven per cent. When a second property is factored in then there is really no chance.

For example if someone borrows €200,000 over 30 years they would have a monthly repayment of €1,013 based on current rates of 4.5 per cent but for the purpose of determining how much a bank will lend they will work out this €200,000 at seven per cent meaning the monthly repayment is considered to be €1,330.

They will then deduct this monthly repayment from a person’s net monthly income and once this is done and if the client has a balance above the minimum income limits then it’s happy days and the chances of getting a mortgage have improved dramatically.

On the other hand if the person’s balance is deemed to be below the minimum income limit then their choices are to continue to rent or live at home, save more, earn more, buy a cheaper property or even find someone in the same position to purchase with. I would advise against the latter option.

The problem with someone who wants to buy a second property, for whatever reason, in addition to keeping their own property is that the bank will stress test both mortgages at seven per cent and will discount the rental income they will be in receipt of by 50 per cent - to allow for unoccupancy - which in all likelihood will rule them out of qualifying for a second mortgage.

The couple I have referred to would need a gross annual income of €90,000 if they were to qualify for the second mortgage so they were quite a bit short of what was required and that was €20,000 of an extra income. The difference, in reality, here was they were being approved for €65,000 when they needed €135,000.

The frustrating element of this is that what people are paying out and in receipt of compared to what banks are actually taking into account are two completely different things. This is even more frustrating because what look like really good lending cases - and they are, believe me - are being refused. Naturally we don’t ever want to go back to banks giving money out hand over fist with little regard to good lending practices. However, banks need to loosen their criteria somewhat.

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