What to consider when seeking a mortgage

A major financial decision like buying a home should not be made lightly, writes Emma Kennedy

14th November, 2016

The recent news that rents have hit record highs makes for depressing reading and is emblematic of Ireland’s broken property market.

This topic came up recently when chatting with some friends - a reasonably representative mid-to-late 30s group; some single, some not; some parents, some not; some in full-time professional employment, some not.

Some already had a mortgage on their own home while circumstances dictated that house purchase was off the table for others for years yet. For the third cohort, rising rents made buying a house - despite the lack of supply and substantial deposit requirements - more of a priority.

One would-be buyer among the group told the story of a visit to see a three-bed terraced ex-council house in a middle-of-the-road Dublin suburb. It listed on property website Daft for €295,000 but by the time the would-be buyer called to confirm the viewing a few days later, there was an offer in for €333,000. By the time of the viewing, a few hours later, the offer on the table had risen to close to €340,000 - beyond the means of that viewer and probably others.

This is a tale I’ve heard repeated many times. It’s not surprising given the supply constraints in the market but it is soul-destroying for would-be buyers.

Despite the perils of the property market, if you are keen to buy a home in the coming months, there’s a lot to consider when seeking a mortgage.

First off, understand the rules. As it stands, you need at least a 10 per cent deposit on properties valued at up to €220,000 and a minimum of 20 per cent above that. Borrowings are capped at 3.5 times gross earnings. A limited number of borrowers can avail of exceptions to the Central Bank rules but don’t bank on it being you.

By way of example, to buy a house on sale for €300,000, would-be buyers need at least a €38,000 deposit to satisfy the rules. This leaves a mortgage requirement of €262,000 -- so applying the 3.5 times rule, this means gross annual earnings of almost €75,000 are required.

Assume a couple saving from scratch, with both putting away €600 per month on top of their rent. For them, saving the required deposit will take just shy of 32 months.

Don’t forget to think about repayment capacity too. So for a mortgage of €262,000, as per the example, repayments (based on a variable mortgage over 30 years) would be about €1,200 per month.

Our sample couple, if saving €600 each per month, and paying rent too, should have no problem displaying to a lender that they can cover this mortgage. But they should also be able to show that they could cover the mortgage if interest rates jumped, so-called stress-testing.

There’s no point approaching a lender for a mortgage until you’ve got the deposit in place and have proven repayment capacity for the amount you want to borrow. That said, some would-be buyers might benefit from an initial conversation a few months before they actually want to seek a mortgage, in order to give them time to iron out any potential issues with their finances.

Getting a mortgage can be a frustrating process. But I’d certainly take that over the loose lending of the boom years. As has been shown so clearly by now, prudence is key for borrowers and lenders alike: a major financial decision like buying a home should not be something done lightly.

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