Making Cents: Applying for mortgage approval during Covid-19 - Liam Croke

Liam Croke

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Liam Croke

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news@limerickleader.ie

Making Cents: Applying for mortgage approval during Covid-19 - Liam Croke

If you were thinking of buying a property in the next 6 or 12 months’, it’s likely you were going to start that engagement of seeking mortgage approval with a bank fairly soon. However, because of the coronavirus, you’re probably uncertain whether you should put a full stop to the process altogether, because you just don’t know what impact Covid-19 will have on property prices, or whether suitable properties will come back on the market any time soon, or will banks revise the amount they are going to lend etc.

Lots of unknowns, and a difficult one to call because it’s just too early to know what the fallout from the coronavirus will be, and what impact it will have on the property market, but suffice to say, it’s going to be significant.

What’s interesting even at this early stage is the availability of stock. Daft.ie measured new properties coming to the market over a two week period coming towards the end of March and found there was a 50% drop in houses posted for sale over the same period last year.

So, Covid-19 has certainly gripped those who were thinking of moving and or selling a property, and I think we’re going to be in a state of flux for a period of time, as buyers and sellers hold off until they know more about what impact Covid-19 will have on asking prices.

If you’re buying for the first time, it’s unlikely that it’s going to be the only property you ever buy.

Research has shown that people are likely to move anywhere between 4 and 7 times during their lifetime. Which means if you’re a first time buyer, you have to be much more price sensitive because getting it wrong and overpaying for something that’s hasn’t reached its bottom price could be costly from (a) the equity you bring with you before you can move to your second property (remember you need a 20% deposit if you’re not a first time buyer) and (b) the additional monthly and interest payments you end up making.

With all of the above in mind, I think it’s prudent to put a pause on your house buying for the time being, until you have more data, and things begin to play out and we see what the real impact on property prices will be.

But that’s not to say you shouldn’t keep one eye on the market either, because something might come up that you feel is great value. And of course, you never want to pay more than you need to, but you don’t want to take the chance of losing out either on something that you think might be your forever home.

Which means, you need to put yourself in the position that if something does come up, you can act quickly and that means getting your finances in place and having your mortgage pre-approved.

And when I say pre-approved, I mean having an Approval in Principle (AIP) in place from a lender, stating that, they’re prepared, for example, to give you a mortgage in the amount of €250,000 or whatever the amount they’ll approve you for, when you've identified a property, assuming at the time you satisfy conditions such as i.e. permanency of employment, 10% contribution from you evidence by way of savings, clean credit report, confirmation of income etc

About 62% of first time buyers have their AIP in place before they buy a property, and the purpose of securing one is knowing how much a lender will be prepared to offer you, and whilst its’ not an absolute guarantee, it closely resembles the amount they will give you when you do identify a property.

A bank won't issue you with a full offer letter unless you have a specific property in mind, and if you don't, rather than having to make a full application with them, the process of getting an AIP is less onerous and the ask is quite light.

And these AIP’s usually last for 6 to 12 months (with AIB and EBS it's 12 and 6 months for BOI/KBC/PTSB/UB ) and if you haven’t seen a property in that time, you just need to re-apply and provide more up to date pay slips and bank statements, and you’ll be issued with a new AIP.

The process of securing an AIP is very easy and not time consuming and it’s something I would urge you to have in place, because its’ an important first step you’ll need to make towards getting your new home, whenever that is.

If you want to get things moving, you need to either contact a bank yourself or reach out to a mortgage broker who can act on your behalf. And as I said, you won't need to go through the full application process to get an AIP, that will come later, when you've had an offer on a property accepted.

And I think having an AIP helps for two particular reasons:

1. It puts you in a strong position when you are actively looking for a property, because if you’re asked by an estate agent, if you have a house to sell and have you an approval in place, being able to answer no and yes, puts you in a very desirable bracket i.e. you are that individual that sellers are looking to attract and deal with.

2. If you were refused by a bank for whatever reason, it gives you time to start working on your application so the next time you apply, you’ll be approved. I’ve met hundreds of people over the years who find their dream home, and everything is very exciting and then suddenly their mortgage application is refused. And it could be for something small, but the damage is done, and the house lost. Had they known in advance, they could have corrected their credit rating, improved their bank statements, not taken on that loan last year, changed employers or whatever it was that resulted in their application being declined.

If you get an approval in principle, remember it’s not a definitive promise that a bank will give you money. It’s an indication of how much they’ll give you, and as long as nothing changes between the time you secure it and the time you identify a property and make a formal application, everything should be fine, but the most common reasons a bank might renege on the AIP they gave you, are when things like the following happen:

n Change in job/employer

n A significant change in income or outgoings

n Taking out a new form of credit

n Missed payments & arrears that didn’t come up during the AIP process

n Lack of consistency/application discrepancies

n Change to lending criteria

Lots to consider and take in, but my advice to those who were thinking of buying a property, but are now unsure because of Covid-19, you don’t have to put a full stop to the process altogether. Yes, take a deep breath until we see how asking prices play out, and in the meantime, if you haven’t got an approval in principle in place yet, consider getting one, because I don’t see the downsides to not having one in place, regardless of how uncertain things seem at present.

Liam Croke is MD of Harmonics Financial Ltd,

based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie