extract from davys stockbrokers
Mandatory mortgage stress testing could mean applying rates of 7.0% next year
One of the issues occupying our minds at the moment is mortgage affordability. Since we did our mystery shopping exercise earlier this summer, ECB rates have risen 0.5% to 3.0% and look like hitting 3.5% by year-end. In fact we expect them to reach 4.0% sometime early next year. Hence first time buyer (FTB) affordability is being slowly squeezed, and the only way for the banks to respond is to stretch out the term even further. The typical FTB term is currently heading for 35 years, so do not be surprised if more of the banks start offering 40-year terms. Note that availability of a 100% LTV mortgage will not solve this problem.
If we take our mystery couple earning €60,000 between them, our average loan offer was €326,000 or 5.4x salary. At the time ECB rates were 2.5%, so over 35 years this equated to 32% of salary being used to pay the mortgage. Note that most banks work off a maximum of around 35% for that kind of income level (some take note of minimum residual income levels too). With ECB rates at 3.5%, that figure rises to over 36%; at 4.0%, it reaches 38.7%. If ECB does hit 4.0% next year, our loan offer would have to be cut to €295,000 (a reduction of nearly 10%) in order to get back within the lending guideline. That would have meant a one-bed apartment and not the two-bed for the couple in our shopping exercise. Extending the term to 40 years would help but not by much - it would cut the figure from 38.7% to nearer 37%, which is less than the hit from a 0.5% rate increase. Finally, investors should bear in mind that the banks are still mandated by the Regulator to stress test mortgage applications for rate increases of 2% from current levels. This suggests that the banks could be plugging mortgage rates of over 7.0% into their new business models next year. That works out at 49% of salary. Ouch!
Mandatory mortgage stress testing could mean applying rates of 7.0% next year
One of the issues occupying our minds at the moment is mortgage affordability. Since we did our mystery shopping exercise earlier this summer, ECB rates have risen 0.5% to 3.0% and look like hitting 3.5% by year-end. In fact we expect them to reach 4.0% sometime early next year. Hence first time buyer (FTB) affordability is being slowly squeezed, and the only way for the banks to respond is to stretch out the term even further. The typical FTB term is currently heading for 35 years, so do not be surprised if more of the banks start offering 40-year terms. Note that availability of a 100% LTV mortgage will not solve this problem.
If we take our mystery couple earning €60,000 between them, our average loan offer was €326,000 or 5.4x salary. At the time ECB rates were 2.5%, so over 35 years this equated to 32% of salary being used to pay the mortgage. Note that most banks work off a maximum of around 35% for that kind of income level (some take note of minimum residual income levels too). With ECB rates at 3.5%, that figure rises to over 36%; at 4.0%, it reaches 38.7%. If ECB does hit 4.0% next year, our loan offer would have to be cut to €295,000 (a reduction of nearly 10%) in order to get back within the lending guideline. That would have meant a one-bed apartment and not the two-bed for the couple in our shopping exercise. Extending the term to 40 years would help but not by much - it would cut the figure from 38.7% to nearer 37%, which is less than the hit from a 0.5% rate increase. Finally, investors should bear in mind that the banks are still mandated by the Regulator to stress test mortgage applications for rate increases of 2% from current levels. This suggests that the banks could be plugging mortgage rates of over 7.0% into their new business models next year. That works out at 49% of salary. Ouch!
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