Making Cents with Liam Croke: Mortgage lending rules - just how much can you borrow?

Liam Croke

Reporter:

Liam Croke

Email:

liam@harmonics.ie

Making Cents with Liam Croke: Mortgage lending rules - just how much can you borrow?

Liam takes you through what you need to bring to the table for a house

I frequently get questions from people who have received mortgage approval but it’s not enough for them, and they need more than what their lender is giving. They want to know what recourse they have, if any?

There are really three things you need to know about, and they are:

 the amount you are allowed to borrow

 the amount you need to personally contribute towards the purchase price

 and how much of an exemption banks are allowed to deviate from the baseline two rules I just referred to.

The above will be influenced by the type of borrower you are, so let’s look at each in turn:

First Time Buyer

How much can you borrow?

Three-and-half times your gross annual income. If, for example, you are a single applicant earning €50,000, you are allowed borrow €175,000.

If you are two first time buyers buying a property together and your combined income is €80,000, you’ll qualify for €280,000.

How much do you need to contribute?

This is commonly known as the loan to value ratio. And for an FTB, the maximum amount you are allowed to borrow is 90% of the purchase price
of a property. So, if the asking price of a property is €250,000, you need to come up with €25,000.

Exceptions

For an FTB, banks are allowed to lend more than the 3.5 times multiple to 20% of new applications. And last year 17% of mortgages to FTBs exceeded the normal loan to income limit.

They can also lend more than the loan to value limit of 90%, where 5% of their new mortgages to FTB can have a deposit of less than 10%. But I wouldn’t be holding my breath that they will grant this to you, because last year, they only exceeded the 90% threshold to <1% of their new mortgages. And in fairness, it seems they don’t have to either, because the average loan to value last year for FTBs was 80%.

Typically you can only get one exception i.e. a higher income multiple or a higher loan to value ration - you can’t have both.

How you can improve your chances of getting an exception

To improve your chances of getting a bank to increase the amount they will give you, you need to give them a good reason to do so, and demonstrating you have the ability to take on a loan of, say 3.9 times your income, is key.

And you can do this very simply.

If 3.9 times your income amounts to, for example €234,000, work out what the monthly cost of that is over, say, 30 years, at a rate of 6%. Banks will typically stress test the mortgage amount by this rate to ensure you have the ability to pay it in the event that rates increase and, you’ll discover, that amounts to €1,403 per month. So, you need to present to a bank that you have been saving with, paying rent or a combination of both, for that amount for the past 6/12 months. If you do, your chances of getting that exception improve dramatically.

That’s stage 1. If you can prove that, then great, but stage 2 is when a bank will look at your disposable income post mortgage repayments, and that has to meet certain amounts as well.

For example, after mortgage repayments are made, the amount they typically want to see left over for people is as follows:

Couple with dependents

If they have one child, €2,300 must be left in their account after all other expenses, like childcare, food, bills, etc. have been deducted.

Single with no dependents

Must have €1,400 left in their bank account after all other expenses and future mortgage repayments have been subtracted.

Single with dependents

Should have an extra €250 per dependent on top of disposable income.

Second Time Buyer

How much can you borrow?

3.5 times your gross annual income.

How much do you need to contribute?

You need to contribute a minimum of 20% towards the purchase. So, if the asking price of a property is €300,000, you need to come up with €60,000.

Exceptions

For a, second time buyer/mover, banks are allowed to lend more than the 3.5 times multiple to 10% of applications, and they can exceed the loan to value limit to 20% of new applications in any one calendar year.

Investors

How much can you borrow?

3.5 times your gross annual income. Other considerations like rental income may be considered, which would increase the amount you can borrow

How much do you need to contribute?

You need to contribute a minimum of 30% towards the purchase.

Exceptions

Banks can exceed the loan to income and loan to value limits, to 10% of new investor applications in a calendar year.