There are effectively only three lenders left providing mortgages – and most are lending only to highly credit-worthy first-time buyers and trader-uppers

IN JUST four years the mortgage market has been turned on its head. Gone are the speculative purchasers and buy-to-let borrowers. Now the country’s banks and building societies are largely only lending to borrowers who are buying their first home or trading up or down in the market.

In early 2008 first-time buyers and mover-purchasers accounted for 40 per cent of the market; figures published by the Irish Banking Federation (IBF) last week showed that three out of every four mortgages (in value terms) provided in the second quarter of this year were to borrowers purchasing a home.

In the same period buy-to-let mortgages fell from almost 20 per cent of the market to just 3.8 per cent.

The reason for this is a sharp fall in both demand and the number of people seeking to buy property in a depressed market and a desire among the remaining lenders to lend only to purchasers who have a large deposit, stable income and intend to live in the property for several years.

The market is also substantially smaller. In 2006 – the year marking the peak of the mortgage and property markets – just shy of €40 billion in mortgages were drawn down. Given the current level of activity, the market will be doing well to pass the €6 billion mark this year.

The difficulty is that the four domestic banks and two building societies are struggling to reduce their own sky-high borrowings and boost their solvency as they attempt to repair their businesses and return to something approaching healthy institutions after the financial crisis.

This means less lending and where banks do lend, they will only deal with low-risk borrowers – namely, people who are buying homes, not investing.

That said, under the terms of the Government’s €7 billion bail-out of Allied Irish Banks and Bank of Ireland, both banks committed to lending an additional 30 per cent to first-time buyers last year. This is reflected in the higher lending numbers to this area of the market.

For political reasons, the bailed-out, functioning banks want to be seen to be lending, though switchers will only be offered good deals where they have a low loan-to-value ratio, presenting a low risk.

It is hardly surprising then that banks themselves and mortgage brokers are saying that there are really only three institutions providing mortgages and they are the lenders in receipt of State funds – AIB, Bank of Ireland and the Educational Building Society (EBS).

All three have at least doubled their traditional shares of the market. Combined, the three lenders are providing about 80 per cent of new mortgages in the current market.

“The market statistics tell the story,” said Karl Deeter, operations manager with Irish Mortgage Brokers, pointing to the fewer number of players actually selling mortgages.

Where banks do want to lend, the demand is either not there or the rates and conditions are too onerous and the loans are not drawn down; where they don’t want to lend, the creditworthiness of the customers is usually the reason.

“The problem for the banks is that they are trying to lend but the people they want to lend to don’t want to borrow and those they don’t want are desperately looking for the money but have a higher credit risk,” said banking analyst Oliver Gilvarry at Dolmen Stockbrokers.

“In banking they say you do the best of loans at the worst of times and the worst of loans at the best of times. The uncertainty in the economy means that it’s very difficult to make calls on who to lend to – I have some sympathy for the banks.”

The decision of foreign banks such as Bank of Scotland (Ireland) to withdraw from the Irish market or sharply reduce their operations in Ireland has made matters worse.

The market has in effect shrunk from 11 players to three as mortgage lenders such as Permanent TSB and Ulster Bank, which traditionally held the biggest market shares, have all but stopped lending or have priced mortgages so high as to be closed to new business.

The two biggest banks, AIB and Bank of Ireland, will only offer, at most, mortgages with a loan-to-value ratio of 92 per cent, meaning that borrowers once again need cash deposits.

EBS recently changed its lending rules, demanding a minimum of a 10 per cent deposit.

The declining market means that affordability has improved. The IBF said last week that the average first-time buyer’s mortgage had fallen to below €200,000 for the first time since 2005.

However, the cost of borrowing has risen and will increase further as banks bring lending rates in line with European averages to pay for their own higher funding costs.

The financial crisis has forced banks to withdraw tracker mortgages which offered borrowers a low margin over the European Central Bank base rate.

Given that this rate is unlikely to rise before the end of 2011, borrowers are only likely to be offered attractive fixed rates for short-term periods of a year or two or a standard variable rate, which banks are increasing. AIB offers the lowest variable rate (3.25 per cent), though this is likely to rise again soon.

Given that a third of borrowers are expected to be in negative equity by the end of the year, a number of lenders, including Irish Nationwide, are offering mortgages where buyers can take a portion of their current mortgage on to a new loan on moving. However, the institutions are only offering these loans on a well-vetted, case-by-case basis.

Where lenders are approving mortgages, they are attaching strict conditions that can deter prospective borrowers and in many cases will only offer a mortgage on a specific property rather than providing an attractive loan offer on an open-ended commitment.

“It all depends on the lender,” said Frank Conway, director of the Irish Mortgage Corporation.

“An offer could have lots of stipulations that could rule you out. Other lenders would seek documents and offer you the mortgage when you find the property and then only keep the offer open for three months when it may have been open-ended before.”

All this is making life very difficult for prospective buyers seeking a mortgage without paying over the odds or having to jump through more hoops to satisfy chastened bankers.