Get match fit for the rigorous mortgage application process by stress testing your own borrowing suitability and repayment capability
Buying a home has never been more difficult.
The purchase cost, the scarcity of stock, the competitive bidding and the arduous application process to get access to finance make life difficult for anyone looking to buy a new home.
Anyone eyeing up a new property also has to demonstrate levels of good financial behaviour that you can make the repayments, as well as show that your saving muscles are being well flexed, even if you already pay a similar sum in monthly rent, and that you have access to additional funds for the other costs associated with such a big purchase.
There is a mortgage for everyone, says Martina Hennessy, CEO of doddl, the digital mortgage broking platform.
The addition of new lenders such as Moko and Nua Money is opening the market a little to look at how people earn their money now.
“When it comes to mortgages, a golden rule is that no two lenders are the same.
"There are ten residential mortgage lenders in Ireland. If you go to one bank, you will be missing out on what 90 per cent of the market has to offer, and chances are you will not get the best mortgage for you.”
Lenders all lend under macro-prudential lending rules, put in place by the Central Bank of Ireland, but she says one bank’s interpretation of allowable income can be very different to another’s.
“A lender’s assessment of variable income, such as commission, bonus, overtime, or shift allowance, can all make a huge difference to how much you can borrow."
Mortgage rates in Ireland range from three per cent to 6.15 per cent. It is so important to understand what the best rate for you is and avoid paying needless interest.
You’re looking for a lender who will give you the maximum levels at the lowest interest level.
Don’t expect loyalty from a lender. A mortgage is a financial instrument. It doesn’t matter who you get it from.
The key to successful applications is to demonstrate repayment capacity.
Hennessy says all lenders will scrutinise responses to the five questions below. Consider how you craft your responses.
Do you have evidence of a sustainable income?
Your eligibility for a mortgage will be based very much on your income.
Standard lending rules for first-time buyers are that you can borrow up to four times your allowable income, and for second and subsequent buyers its three-and-a-half times.
Income needs to be from a sustainable source, such as permanent employment, a long-term contract, or, if you are self-employed, at a minimum, a bank will look at your tax returns - your taxable income for the prior two years.
If you move jobs before or during a mortgage application, this can be an issue, as in most contracts, there is a six-month probation period.
Most lenders’ credit policy requires that probation be completed prior to application.
Some exceptions can be made to waive the requirement for probation to be complete, but this is very much on a case-by-case basis, depending on the strength of the overall application and the qualifications and employer of the applicant.
If you move from being employed to self-employed, then bear in mind it will most likely be two years at a minimum before you can apply.
A bank will take an average of your tax return income over the last two or three years, depending on the lender.
Have you factored in both deposit and transaction costs?
All mortgage applicants must have at a minimum, a 10 per cent deposit to go towards the purchase of a home.
This can come from savings, gifts, the Help to Buy scheme, if you are a first-time buyer purchasing a new build home, or equity, if you own a home and are selling it.
Gifts are very much prevalent in the Irish mortgage market, with 37pc of doddl clients receiving one.
However, it is important to note that some lenders require that you show that you have saved the equivalent of at least five per cent of the purchase price yourself.
An application has to be made on its own merit.
The reason savings are important is that they demonstrate a level of discipline, that you can put money away, outside of standard monthly rent payments, on an ongoing basis.
Any level of savings from €5,000 upwards will be taken into consideration.
Set up a monthly direct debit to a savings account.
When making a mortgage application, a bank will need to understand the source of your deposit and transaction costs, and if you can’t outline the source of funds, it will not progress to approval. You have to set it out.
A bank will also need to see that you have funds to cover legal fees and stamp duty to complete the purchase.
As such, it’s not just a 10 per cent deposit that you need to show, it's stamp duty, which is one per cent of the purchase price on homes with a value of up to €1 million, and two per cent on those in excess of €1 million.
doddl advises its clients to budget 12 per cent of the purchase price to cover the deposit and transaction costs, including stamp duty and legal fees.
For example, if buying a new home for €500,000, you have to have a 10 per cent deposit, €50,000, of which €30,000 could come from Help to Buy, €20,000 from the buyer's own savings, plus a further €5,000 for stamp duty and another €2,000 to cover stamp duty and legal fees.
You must have transaction costs ready to pay at the time of closing, when you get your keys.
Can you show clear evidence of repayment ability?
Demonstrating evidence of repayment capacity is the main reason why applications can be deferred or declined.
All lenders, except one, require that you show clear evidence of repayment capacity during the six months immediately preceding application.
As part of the mortgage application, you will be asked to submit six-month bank statements on all your accounts, and doddl’s role as a broker will be to work through your statements to build a profile to demonstrate how the proposed mortgage is affordable to you.
Items such as rent, savings and loans that will discontinue prior to mortgage drawdown, can all be taken into account.
If coming to the end of a loan, with, say, three months on loan, let the bank know it will be cleared and when.
That loan's repayment capacity can then be added to your borrowings.
If you have a loan drawing to a close, it shows that you have more disposable income to pay a bigger mortgage.
As a rule of thumb, doddl suggests that for every €100,000 you want to borrow over a 30-year term, you will need to show repayment capacity of €500 per month.
As such, borrowings of €400,000, would require you demonstrate a repayment capacity of €2,000 per month.
A combination of rent and savings that amounts to €2,000 per month demonstrates that capacity.
These sums could be shared across two people if the mortgage application is to be made jointly.
A lender will note that your mortgage repayment needs to be paid every month, so in proving repayment capacity, consistency is crucial. Don’t skip a month of savings; ensure there are no gaps.
Can you show repayment for existing loans and personal guarantees?
If you have a loan in place, this generally does not preclude lending, but taking out a new loan before you make a mortgage application is something to reconsider.
Where any new commitment is taken out, a bank generally likes to see its impact on your overall finances before committing further, so it could be months before you get approval in principle.
For example, if you are just about showing a repayment capacity for the mortgage sought, with no other surplus, and you then take on a car loan of €400 per month, a bank may want to see the loan in place for a number of months to assess how you manage this new loan commitment, and whether it will have an impact on your ability to repay the proposed mortgage, before issuing approval. .
If you are self-employed and a sole trader, or in a partnership, any loans you take out for the business will appear on your credit report and will be factored into your mortgage application.
This is the case even if the business makes the repayments.
If you are a shareholder in a limited company, then the loan is in the limited company’s name and, as such, will not appear on your credit report.
If you provide a personal guarantee for a loan within a limited company, then it will appear on your credit report and will need to be factored into any mortgage application.
Do you have a clean credit record?
When making a mortgage application, you will sign a declaration stating that the bank can run a credit check on you.
The credit check is run based on your name, age and address and will show any credit facilities of €500 or more which you have held and that are now closed within the last five years.
It will also feature any credit facilities that are currently in place.
A bank will use your past credit behaviour as an indicator of future creditworthiness.
If you have missed payments on a loan, or on a credit card, then these will appear on your credit report.
The credit report will show how many times payments were missed, and if there are multiple markers on the credit report, then a bank will generally decline an application.
If you have any concerns regarding your credit report, Hennessy advises that you apply for a copy of your credit report from the Central Credit Register (CCR).
It is free to do so, and it will give clarity on your position.
If there are negative markers on the CCR, then you would need to provide a satisfactory explanation as to why these payments were missed.
Some lenders will consider applications where there are two clear years without any missed payments and where a satisfactory explanation is provided.
If you have lived outside of ROI in the last three years or hold accounts in any other jurisdiction, then you will need to provide a credit report for the relevant jurisdiction as part of your mortgage application.
