Based on current Central Bank regulations, any lender will give you 3.5 times your income or your combined income if buying with a partner or friend
AT the beginning of every year, I like to write a piece about getting prepared to buy a house and applying for a mortgage.
I know at the top of many people’s wish lists, particularly first-time buyers (FTB’s), is getting on the property ladder and buying their very own home.
And towards the end of last year, saw a surge of mortgages being approved, with FTB’s leading the charge with them accounting for nearly 6 out of every 10 approvals. October saw the biggest approval rate since the Banking & Payments Federation Ireland, began collecting data in 2011.
The expectation for the year ahead, is that new application numbers will continue to grow because many people who were finding it difficult to save the 10% deposit have been able to turbo charge their savings over the past year because of Covid 19.
I’ve encountered many FTB’s who moved back home, and some have told me they’ve been able to save upwards of 70% of their salary which has fast forwarded the buying and mortgage application process for them.
And many others will purchase because they want to take advantage of the help to buy scheme which was extended to December 2021. The bigger incentive to use this scheme was the increased relief which went from 5% to 10% of the purchase price. Of course, the scheme has its limitations’, and it may not suit everyone, but the opportunity to purchase a property with ZERO savings is a possibility through the scheme.
Anyway, if it’s your plan that this, is the year you’re going to have to make an application for mortgage approval, or perhaps this is the year you’re going to start saving towards buying a property and you might be still 2 or 3 years away from buying, I want to tell you how you should put your best foot forward so that whenever an application made, and whoever it’s with, it will be approved.
This week, I’m going to outline the first and probably most important area you need to be cognisant of now, with the remaining four more to follow next week.
Know how much you can borrow
Based on current Central Bank regulations, any lender will give you 3.5 times your income or your combined income if buying with a partner or friend. They have scope to increase this by 20% of their new loan to FTB’s, so they might increase the multiple, but I wouldn’t count on it, and I’d work off the assumption that you’re going to be approved based on 3.5 time’s your income.
The 3.5 times multiple is a quick and easy calculation but don’t assume that that’s it, and that’s the amount you’re guaranteed to secure, because it isn’t.
Lenders will carry out two tests to ensure the 3.5 times rule stands up, and the first is working out what that multiple will amount to each month, and have you demonstrated an ability past and present to repay that amount.
Let’s assume you’re 30, and you’re buying in your own name, and you earn €60,000. A bank is likely to tell you, you can borrow €210,000 (€60,000 x 3.5)
Now they’re going to look at what the monthly cost of that €210,000 is, and they’re not going to do it at current interest rates. No, they’re going to stress test the repayment to absolutely see you have the ability to repay it and they’ll do this by working out what the monthly repayment is based on their variable rate plus 2%.
If, their variable rate is 3.5%, they’ll add on 2% and work out what the monthly repayments are based on a repayment rate of 5.5%. And some lenders will stress test at a rate of 6% regardless of what their variable rate is.
So, they’ll work out what €210,000 is over 35 years’, at 6%. And the monthly repayment in this instance is €1,197.
Now, they’ll want to see from the documents you’ve submitted, that you can show them that over the past 6 months’ you have been saving or paying rent or a combination of both, in excess or equal to this €1,197.
It doesn’t matter if your income multiple shows you can borrow €210,000 or much more, if you can’t prove and demonstrate that you can meet that future stress tested monthly repayment. That’s the key for any bank and it gives them the comfort they’re looking for.
So, don’t make any application unless you can show them, your new monthly repayment won’t be a shock to the system, because it’s an amount you’re currently paying via savings, rent etc.
If, for example you are looking at properties where the mortgage costs will amount to c. €1,500 each month, then prove to them that you will be able to repay this amount by saving that amount each month or prove via bank statements that you are paying that amount each month in rent.
They will further valid the amount they’ll lend to you, by looking at what amount is left over after you’ve made the monthly mortgage repayment, and this is where existing loan commitments can impact an application.
You may have ticked the box on the income multiple, and you’ve ticked the box on showing you can meet the stress tested monthly repayment, the next box you need to tick is the amount remaining after your mortgage repayment.
Banks don’t want you to be held hostage to your mortgage repayment. They want you to have a life and they have minimum amounts they look to, to ensure that will be the case.
In the case of single applicants, they want to see that after mortgage repayments are made, and other cost of living expenses, the amount left over from their net monthly income is c. €1,400.
And for couples, that amount is about €2,300 and if you have a dependent child, they will increase that amount by a further €250.
It means that you may have to get rid or at least lower any monthly repayment you have on existing debt to ensure you fit into having the amount banks want you to have left over. So, run the numbers to make sure you do, it could look something like this.
€60,000 = net monthly income of €3,496. Current savings rate is €1,400. Seeking €210,000 loan approval.
Test 1 (Income Multiple)
3.5 x €60,000 = €210,000
Test 2 (Proven repayment ability)
€210,000 x 6% at 35 years = €1,197.
Current savings rate = €1,400.
Test 3 (Income Post Mortgage Repayment & Living Expenses)
€3,496 – (€1,197+€800) = €1,499
Minimum required €1,400.
These are the three tests you have, to pass, to get approval and they’re the first things banks will look at, and they’ll then move on and look at other areas which I’m going to cover next week, and they are, savings, employment, accounts and your credit rating.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted by emailing email@example.com or at www.harmonics.ie