A cyclist passes hoardings advertising properties for sale, to let and sold in Dublin.... Read More
Banks including Allied Irish Banks Plc (ALBK) and Permanent TSB Group Holdings Plc (IPM) said they expect to increase lending for rental properties this year. They’re seeking to widen profit margins by charging higher rates for residential investment loans as rents increase because of a housing shortage.
Property lenders are returning to one of the world’s worst mortgage markets. Banks’ easy credit policies led to the default or modification of 12.5 billion euros ($15.7 billion) of residential investment loans after the country’s housing market crashed in 2008. This time around, banks are tightening their mortgage standards and some are
targeting experienced landlords rather than the amateur investors who had been drawn to the so-called buy-to-let market.
“The big mistake in the past was where borrowers were using their family home, taking some positive equity out,” to buy properties for lease, said Fergal McGrath, chief executive officer of Dublin-based Dilosk Ltd., which plans to start lending at the end of the year. “We’re targeting the professional landlord.”
Ireland’s buy-to-let market was almost wiped out by the country’s property crash. Loans for rental homes accounted for about 14 percent of new mortgages in 2006, the height of Ireland’s Celtic Tiger economy. The figure was 3.9 percent, or 188 loans, in the second quarter of this year, according to Dublin-based Banking & Payments Federation Ireland.
Stringent Underwriting
McGrath said Dilosk will focus on professional landlords and base its lending strictly on the rental income of a property rather than the borrower’s income. The lender plans to cap loans at 70 percent of the price of a property.“It’s all about stringent underwriting, not trying to make a deal work,” McGrath said. “If the debt service coverage doesn’t work, don’t bring in other variables -- guarantors, borrowers’ income. I think that was the mistake” in the past.
AIB, the country’s biggest home-loan provider, takes into account borrowers’ additional sources of revenue in case tenants vacate the property as well as rental income to determine if a mortgage is affordable. The company, which needed a 21 billion-euro state bailout between 2009 and 2011, requires borrowers to place a deposit of at least 25 percent of a property’s price to get a mortgage. During the boom, Irish banks asked for down payments of as little as 15 percent.
Housing Shortage
“We never changed our policy of being in this market, but we have changed our criteria for borrowers,” said Michael Quirke, head of mortgage business development at AIB. “We have certainly seen more interest in buy-to-let in recent months.”Quirke said AIB borrowers could be couples who have paid more than half of their own mortgage and are trying to buy a property for their adult children before prices rise too much. The borrowers would rent part of the property to help pay the mortgage, he said.
At Permanent TSB, borrowers need six months cash to cover periods without rental income, proof they can withstand a 2 percentage-point interest-rate increase and a down payment of at least 25 percent of the purchase price, said Richard Kelly, head of mortgages at the company.
Landlords are benefiting from a housing shortage that’s driving up rents. They rose for Dublin houses 8.5 percent in the year through June, according to the government’s Private Residential Tenancies Board. The average payment has increased 15 percent since beginning to rise in the first quarter of 2011.
Price Surge
Landlords also are enticed by home values that surged 25 percent in Dublin in August compared with a year ago, according to the Central Statistics Office. Prices will keep rising as unemployment drops and the housing supply stays tight after developers stopped building in the wake of the crash, according to Dermot O’Leary, chief economist at Dublin-based Goodbody Stockbrokers.“The conditions are all there for a rebound in the BTL market,” said Stephen Lyons, an analyst with Dublin-based securities firm Davy. “Banks will be looking for much more equity up front and will have stricter underwriting, but they’re under pressure to lend and increase their margins.”
For lenders, residential investment mortgages can be more profitable than home loans. AIB charges a 5.35 percent standard variable rate for buy-to-let loans, compared with 4.4 percent for owner-occupier loans.
Margin Hunt
“Banks are on a hunt for margin again,” said Karl Deeter, founder and compliance manager at Dublin-based Irish Mortgage Brokers. “The risk is much lower for buy-to-let than owner-occupier loans because they are getting borrowers to put up much bigger down payments than for private homes and charging them higher rates.”Ireland’s central bank plans to impose limits for the first time on how much banks can lend home buyers, two people with knowledge of the matter said yesterday.
The regulator is preparing to publish a consultation paper on its proposals within weeks, one of the people said. Banks and lobby groups will have a chance to comment on the plan, which centers on introducing loan-to-value and loan-to-income restrictions.
Banks are still digging themselves out of the 2008 financial crisis that devastated the Irish economy. Home prices fell by 50 percent from 2007 to the middle of last year. Unemployment tripled to more than 15 percent by 2012 and rents plunged, leaving many investors unable to service their loans or sell their homes.
Draghi’s Plan
Almost 43 percent of the 29 billion-euro residential investment loans on banks’ balance sheets are now either more than 90 days behind in repayments or have been restructured, according to Ireland’s central bank. About 25 percent of owner-occupier loans are in the same distress.European Central Bank President Mario Draghi’s plan to buy asset-backed securities may give Irish banks access to cheaper money and buttress a lending revival.
Dilosk bought 223 million euros of performing mortgages from Bank of Ireland last month and plans to issue residential mortgage backed securities against the loans next year.
Draghi’s willingness to buy asset-backed securities and RMBS starting this month should make them easier to sell, resulting in lower coupon payments for Dilosk on the proposed securities. The lender could take the cash raised by selling the RMBS and lend the money to landlords, McGrath said.
Moody’s Investors Service upgraded the ratings on 38 notes in 16 Irish prime RMBS transactions in July and August amid signs of stabilizations in arrears.
Tax Break
Property investors face the risk of rising mortgage costs. The European Central Bank benchmark interest rate, at 0.05 percent, is a record low. When rates rise, they could go up very quickly, Brendan McDonagh, CEO of Ireland’s bad bank, the National Asset Management Agency, said at a Sept. 17 conference. And Irish Finance Minister Michael Noonan has signaled that he’ll end a tax break aimed at encouraging investment in real estate in the 2015 budget, which will be unveiled on Oct. 14.McGrath, a former head of asset backed securities and structured credit at Dexia SA (DEXB), the Franco-Belgian lender that’s being wound down, said banks will benefit as more Irish become long-term renters. The number of households in rented accommodation rose by 47 percent in the five years though 2011, according to the statistics office, driven by the property collapse and the tightening of credit.
“The old concept that rent was wasted money, that mentality has changed in Ireland,” McGrath said. “There’s the belief that we’ll let the landlord take that real estate risk going forward.”
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