Taking the mystery out of mortgages if you're planning to buy a house
Brought to you by First Choice Financial Services.
Separating the mortgage truths from the mortgage myths.
Buying a house is the biggest investment you’ll ever make so it’s understandable if you find the process a little bit intimidating. There are all sorts of mortgage myths so it’s hard to work out what’s true and what’s not.
We talked to the good people at First Choice Financial Services to see what you need to know if you’re thinking of buying a house. We’ll start with the basics. All lenders have to comply with the Central Bank of Ireland (CBI) regulations. There are two important rules you need to know.
The Loan to Income (LTI) ratio means that banks can only lend you up to 3.5 times your gross salary – that’s your annual income before tax. If it’s a joint application, that’s your combined gross income.
The Loan to Value (LTV) ratio dictates how much you can borrow based on the size of your deposit. First-time buyers can borrow up to 90% of the purchase price of the house. For second-time buyers, it’s 80%. Your mortgage still needs to be within 3.5 times of your income/combined income.
Now that you've got that, let's address some common questions about mortgages.
If all financial institutions follow the same rules then why can I qualify for different amounts with different lenders?
All banks have a credit policy. A bank’s credit policy is the guideline that lays out the qualifying criteria for all mortgage applications. Credit policies will differ slightly between banks. It’s because of the difference in credit policies between banks that you might be offered more with one than another.
What do banks mean when they talk about a “demonstrated repayment ability”?
It’s essential that you can demonstrate the ability to afford the monthly mortgage repayment. Banks will require you to show at least six months repayment ability prior to any application. They’ll take into account any regular monthly savings you make and any rent you pay. They’ll even consider any loan repayments that have recently finished or are due to finish soon.
Chat to a mortgage advisor six to nine months before an application to see what your repayments would be and how much you’ll need to have set aside. Set up a standing order for any rent you pay or for any contribution you make if you live at home. Set up a designated saving account for your regular monthly savings and don’t dip into it over the course of the month.
What is your net disposable income?
This is the money you’re left with after all your financial commitments have been repaid for your day-to-day living and expenditure. Financial commitments are things like other loan repayments, credit cards, overdrafts or maintenance payments.
The figure a bank requires you to have left over varies from application to application. It is calculated on things like income levels and the number of dependents you have. So a couple with two children need to have a higher amount of income remaining each month to cover any childcare costs or extra expenses than a couple with no children.
Having other loans at the time of applying for a mortgage isn’t necessarily a bad thing but it can affect the maximum amount you could potentially borrow. Your bank will assess this using a stress test.
Are there any exemptions to the CBI rules?
Each lending institution can issue mortgages which are outside of the Central Bank rules. There are two types of exemptions. Loan to Income exemptions allow the lender to issue a mortgage at more than 3.5 times your income and Loan to Value exemptions allow the lender to issue a mortgage for more than 80% or 90% of the purchase price.
Each institution is only allowed a certain percentage of exemptions per year. Therefore, each application is accessed on a case-by-case basis and some banks might already have issued their yearly quota. They might also have a different credit policy for exemption cases and non-exemption cases. Qualifying for a mortgage within the CBI rules does not automatically mean you can qualify for an exemption.
I am paid by the hour rather than receiving an annual salary. How is my income assessed?
Sometimes people who are paid by the hour think they won’t qualify for a mortgage. This is not the case. If you are paid by the hour, most banks will require your payslips for the last 12 weeks as well as your most recent P60 to calculate an average income on which to assess you.
Can I make a mortgage application if I’m still in a probationary period?
If you’ve changed jobs recently and are currently on probation, you can still make an application. The bank will probably put a condition into the mortgage to place it on hold until your probation period is passed however
Can bonuses/overtime/commission be assessed as part of my income?
You might be able to have a certain percentage of your bonus/overtime/commission taken into consideration. If this income is guaranteed and confirmed by your employer, then the full amount can potentially be included.
However, if it’s not guaranteed, most banks will look for two to three years’ P60s and additional payslips to show that it’s received on a regular basis. In this instance, they might take between 20% and 50% into consideration.
I am self-employed, how is my income assessed?
Sometimes, self-employed people feel it’s tough for them to get a mortgage. While there is extra documentation required at the time of application, this should not deter self-employed people from applying.
Banks will look for the last two years’ accounts available to you as well as two years’ personal tax returns to calculate what income can be assessed. They will also look for a confirmation from your accountant that your tax affairs are up-to-date. It’s assessed on an average of the two years’ accounts.
What if I have signs of online betting on my statements?
This depends. There’s a myth that if you’ve any records of betting on your bank accounts, it’s an automatic decline. This isn’t true. A bank will note it at the time of application but if it’s for small amounts and fairly irregular, this will be fine. As long as it’s not excessive or causes the account to become overdrawn or have any direct debits to be returned, it should be fine.
My rent is higher than the mortgage repayments and I can also show that I can pay my loan. Why am I not qualifying for the amount I want?
A lot of times, people’s rental commitments might be similar or higher than the proposed mortgage repayment. You might have a loan which you can show is always paid on time, yet the bank is telling you that you can’t afford to have the mortgage and your loan repayments together. This is usually because of the net disposable income a bank calculates is needed to approve an application.
This can also affect people who are able to demonstrate the ability to pay rent and live comfortably while having a family. For each child, this disposable income amount is usually increased which can make it difficult sometimes for people to qualify for certain mortgage amounts.
First Choice Financial Services have offices in Limerick and Dublin but serve their clients nationwide. They would be delighted to hear from you. For more information, check out the website or contact firstname.lastname@example.org, email@example.com and firstname.lastname@example.org
Brought to you by First Choice Financial Services.