I can’t remember the last time I received so many calls and emails from people looking for, and asking for advice about mortgages.
You could hear the excitement in the voices of those I spoke with. They had identified their dream property, the location was perfect, and they could visualise themselves living in it.
But of course the excitement is tempered by the fact that they need to get a mortgage if their dream is going to come through.
They become afraid to get too excited just in case their mortgage application is declined. This leads to many sleepless nights and in many cases it’s worrying for no good reason. So, in this article I want to help you separate hearsay from the facts about borrowing money and how banks assess applications.
The first area you have got to consider is how much you can borrow. I have seen people make applications for amounts that are clearly beyond what they can comfortably afford, and get declined by banks, which obviously hugely frustrating for them.
But of course what a bank thinks you can borrow and repay, and what you think you can, can be miles apart. Unfortunately the bank is holding the purse strings so it is their opinion that counts most. So let’s look first at how much they are willing to lend to you.
Under current guidelines as laid down by the Central Bank, the amount you can borrow is based upon a multiple of your income i.e. 3.5 times. If, for example you are applying with your partner and you both earn €50,000 then your will qualify for €175,000 (€50,000 x 3.5)
But it doesn’t just stop at that, and this income multiple in many ways is too simplistic in my opinion and can lead to people assuming they will qualify for a particular amount using this method only.
There are many other factors that will impact on whether a bank will give you a particular amount or not; things like at what interest rate a bank stress tests the amount you are borrowing; whether you have children; your type of employment; if you have any other loans and what their monthly repayments are etc.
For example, if you both earned €50,000 and had a car or personal loan, and wanted to borrow €175,000, then your monthly loan repayment could not exceed €132; if it did, it would reduce the amount you could borrow.
If you earned a combined income of €50,000 and you had a car repayment of €350 each month, then rather than qualifying for €175,000 under the multiple of income rule, you would qualify for c. €153,000 which is significantly less so that car repayment is reducing the amount you can borrow in this instance by €22,000.
The second area you need to be cognisant of is how much you will need as your contribution towards the purchase.
If you are a first time buyer, you will need 10% on amounts up to €220,000 and 20% on the balance. If you are second time buyer, you will need 20% of the full amount. Banks can go outside the guidelines by as much as 15% of their total loans issued. But for them to do this, my experience is that they would have to have a very good reason to do so.
This leads on to evidence of funds and your contribution towards the purchase, and this is very important. Regardless of how much you can borrow, if you can’t show that you have saved the majority of the balance, or it is coming from the sale proceeds of an existing property, then your application is under threat, no question.
Ideally you would show a regular lodgement each month into a separate dedicated account, but if there are months where you miss saving then that is OK as well. As long as you can show you have saved the funds over time and they are available to cover your contribution, your solicitor’s fees etc. you will be fine.
Another key to getting mortgage approval, one that is not highlighted as much as others, is being in steady, permanent employment. A mortgage underwriter will want to know that the income you bring in every month is consistent and is expected to continue into the foreseeable future. So, don’t jump from job to job too much before applying for a mortgage.
I came across someone recently who moved employers a month before he was to complete the purchase of a property, and it didn’t turn out well for him, because he was subject to a six-month probationary period with his new employer. So, even though he had been issued a loan approval letter, and his new employer was giving him more money, his lender would not issue any funds until his probationary period was successfully completed so he lost out on the property and his deposit in the process!
There are many other areas that are important to banks as well, like how you manage your finances each month, what your credit history is like, and they can carry as much weight to your application as your income and savings do, they are that important.
Applying for a mortgage is stressful, of course it is, but you can ease the stress with a well thought out, know what I need to do in advance plan, because if you do, and if you need to get help from someone in the know before you do, then do, because the outcome, not to mind the hours saved lying awake at night, will be so worth it in the end.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie