Pressure for larger loans to make housing more affordable for first-time buyers is now building. Mortgage brokers report increasing numbers of young couples looking for substantially larger mortgages than would be allowed under the lenders' traditional guidelines.
Many find that while they may be paying £500 or even £600 a month on rent, they are only allowed to borrow the equivalent of £400 a month.
One way for the lenders to address this problem is to begin looking at borrower's net, after-tax income rather than the gross, pretax amount.
This is already being done by First Active across the board and other lenders are using the system as a back-up to their traditional guidelines.
The benefits of the system, which was also mooted in the recent Bacon report, are that it allows the lenders to more precisely decide how much an individual borrower can afford.
It takes explicit account of borrowings and, of course, marital status, which can make a substantial difference to a couple's after tax income. Conor Nolan, general manager group credit at First Active, is currently working on a systematic system based on net criteria. According to Mr Nolan, the way forward has to be based on disposable income. He points out that six or seven years ago, the guidelines of 2.5 times a gross income equated to about 33 per cent of net income for people on 90 per cent loans. Because of a halving of interest rates and tax reductions over that time, a loan of 2.5 times gross income now often means an expenditure of under 30 per cent of after tax salary.
These moves also mean that people who used to be able to afford homes in certain areas can no longer afford them and this is leading to wide-ranging social changes which have not been adequately planned for.
However, he also stresses that lenders have got to allow for possible interest rate shocks. The interest rate environment at the moment is very benign but there is no absolute certainty in the world of finance and increases over the coming years cannot be ruled out. A reasonable precaution, which some lenders are already insisting on, is that borrowers take out a three or five-year fixed-rate loan. This is particularly true of first-time buyers without children. All lenders point to the substantial extra costs of raising children and in paying creches or other minders. This can amount to the equivalent of an extra £50,000 on a loan, according to some calculations.
The basic net lending criteria is currently about 25 per cent but it does rise to 40 per cent of after-tax income for people on larger loans. All lenders point out that people on higher salaries have the option to spend extra on a mortgage without affecting basic subsistence.
Bryan Moloney, of Moloney Mortgages in Donnybrook, points out that with five-year loans now available at under 5 per cent, there is hardly any risk at all to the lender.
He points out that in 1993 interest rates were over 10.3 per cent, which would have meant repayments of £788 on an £80,000 mortgage. Now, with rates at 5.1 per cent, the repayment would be about £532 a month on the same size of loan. Whereas a repayment of £788 would allow a mortgage of £188,500 loan, enough to put the average new home in the reach of far more first-time buyers.
THE Central Bank is also looking at the idea - but for now it remains opposed to it. The bank will hold talks with the Department of Finance on the matter but as yet no meetings have taken place. Both are also likely to meet the institutions on the issue.
However, the Central Bank remains worried that imprudent lending could damage a lenders' financial fitness if the market were to take a severe nose-dive. The spectre of a UK-style housing recession, with all the problems of negative equity, is also enough to add to its caution. Nevertheless, it appears a greater move to net lending is now almost inevitable.
