Paying the agreed price for a house is just the beginning of the cost, writes Liam Croke
There are things that will stay with us for the rest of our lives – first girlfriend or boyfriend, first kiss, first job. All unforgettable moments, and we can add buying your first property to the mix as well.
Buying a property for the first time is a big deal and is likely to be one of the biggest financial decisions you will make during your life.
One of the biggest mistakes first time buyers make is when they are paying, e.g. €1,400 in rent each month, to then buy a property where the monthly mortgage equates to €1,400.
Your mortgage repayment isn’t the only monthly expense you'll have once you become a homeowner. You’ll have additional costs which include life assurance and home insurance premiums, property tax and utility bills. Unexpected expenses are also likely to occur. So, you need to look at your total monthly costs and not just your mortgage repayment.
I helped arrange a mortgage last year, for first-time buyers who borrowed €300,000 over 30 years, their monthly mortgage repayment was €1,297.
On top of that, their life assurance premium was €50pm, their home insurance cost was €46pm. The property tax attaching to the property worked out at €49pm. I estimated their heating costs were going to be €59pm, electricity costs of €41pm, refuse collection c. €25 pm, and telephone and broadband bills €39 pm. They were also likely to spend on average €50 per month on improvements, additional household purchases and repairs.
The conservative cost of home ownership for them each month was going to be c. €1,656 which was 28% higher than just what their mortgage repayment was. And anyone thinking of buying a property, a good rule of thumb is adding between 25% to 30% of what their mortgage repayment is to get the true monthly cost of home ownership.
The amount you should be paying towards your mortgage shouldn’t be greater than 28% of your net take home pay each month or 36% when combined with other debt.
The reason I reference these numbers is that evidence from studies would suggest, people with mortgage debt to income ratios greater than 28% are more likely to run into trouble making repayments on time and will suffer more if they are exposed to an income shock i.e. a reduction in their income as a result of redundancy, illness, partner’s loss of income etc.
My next piece of advice would be not to start looking at buying a property until you have pre-approval. There’s no point. You mean nothing to sellers unless you have evidence you can buy their property. Getting pre-approved will also save you time, by preventing you from viewing properties that are outside your price range.
The amount a lender is willing to advance is determined by how much you earn. Based on current Central Bank regulations, most banks will give you 3.5 times your income or your combined income if buying with a partner. They have scope to increase this by 20% of their new loan issued during 2019, so they might allow 4.5 times your income.
The amount a first time buyer has to contribute towards the purchase price of a property is 10% but banks again have discretion to deviate from this amount by 5% of their new lending each year, so they could effectively give you a mortgage of 100% but the chances of them doing this are low. And even if they were willing to give it to you, I would suggest you decline it, unless you have absolutely zero chance of ever getting a deposit together.
The bigger deposit you have, the lower your monthly repayments, and the bigger buffer you have if house prices decrease in the future, and you wanted or needed to sell your property.
I appreciate getting to 10% is a very big ask in itself, but when you reach it, don’t let it be the trigger that makes you buy a property either. Unless a property you absolutely love comes on the market and it fits into your price range, don’t buy it. Don’t settle for any old house.
Don’t forget to have a contingency fund in place either after you have bought a property. As good as it is to have as big a deposit as possible, you don’t want to exhaust all of your savings. The reasons being (a) you may need money to carry out renovations to the property or you may need new furniture, or need funds for new decorations etc. and (b) you should have funds in place, that you can call upon in the event of you losing your job, or your income being reduced.
Maybe keep back five or six months’ mortgage repayments from your savings, so it’s important to factor them into the amount you need to save towards the purchase as well.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at email@example.com or www.harmonics.ie