How do I know if my application has the right stuff?
Speak to us at AM Financial, of course! If you contact us, the first step is usually a video-call which lasts about half an hour. There is no fee for this call. We will go through your financial details and assess your situation.
If you are a first-time buyer and looking to learn from the start, you can go here.
Some of what the lenders look at is the obvious stuff. They will look at your earnings. Depending on the lender, bonuses and overtime may be taken into account. Have you passed your probationary period with a new employer?
Your savings will be looked at - to see if you have built a sufficient deposit and to see if you have a track record of keeping to financial commitments.
They will run a credit check to see if you have missed any loan payments in the past. This is a red flag but may be overcome with certain lenders. Do you have other loans, including car finance outstanding? Too many other commitments will spell trouble for mortgage approval.
Your age is important. In general the lenders will want the mortgage repaid by age 65. However, some lenders can go to 70. If you are 50 now, this leaves only 15 or 20 years to repay. This may make the monthly mortgage payment too large.
They look at the value of the property you want to buy. Is that value easy to obtain? Then they look at the loan size you want. Is there a guarantor to the loan? Is someone providing a gift to help with the purchase?
But this blog is not about those things. It is about the rules that guide mortgage lending in Ireland. Some of these rules are external to the lenders - e.g. coming from the Central Bank. Others are lending policies which vary from lender to lender. This blog takes you through some of these rules to help you understand what a successful mortgage application looks like.
There are so many rules - is is hard to know whether we tick all the boxes.
Yes, let's start with the rules. The Irish Central Bank imposed some rules on mortgage lending in 2015. Lending had become reckless in the latter end of the Celtic Tiger and particularly in 2006 & 2007. Ireland was not alone in introducing such rules. In the main, the basic ideas behind the rules are sensible. You need to have a deposit to buy a property. And your lending should be capped at some multiple of your earnings.
What are the Central Bank rules?
Deposit Rules (LTV Rule)
If you are a first-time buyer, you need to have a minimum deposit of 10%.
Subsequent buyers must have a minimum deposit of 20%.
Investors buying a property to rent out must have a minimum deposit of 30%.
For example, if you are a first-time buyer looking to buy a house with value €400,000, you will need to bring a minimum deposit of €40,000. This is another way of saying that the maximum allowable loan is €360,000. The deposit rule is sometimes called the loan to value (LTV Rule).
The maximum LTV for a first time buyer is 90% (with the 10% deposit). The maximum LTV for a subsequent buyer is 80%. The maximum LTV for a buy-to-let investor is 70%.
Loan to Income Rule (LTI Rule)
In general, the borrowing amount is limited to 3.5 times your gross annual earnings. So if you (or you and your partner together) have an income of €100,000 per annum, your allowable borrowing is capped at €350,000.
But what about exemptions to the Central Bank rules?
Yes, exemptions are available. The Central Bank has permitted lenders to have a bucket of their loan book above the limits. For example, 20% of the loan book for first-time buyers may exceed the LTI limit.
AM Financial works very closely with the mortgage lenders in the broker market. Some of the traditional banks are leaving but new non-bank lenders are joining. We are aware of which lenders have space for exemptions and what you need to qualify for them. Speak to us to find out if you qualify. Certain borrowers for example can borrow beyond the 3.5 times gross annual income limit. Typical extensions can be up to 4.5 times gross annual income but depend on the lender and on the borrower's circumstances. In general, the exemptions are given to borrowers with higher earnings.
In general, it may be possible to get an exemption on either the LTV rule or the LTI rule but not both simultaneously.
Mortgage switching does not fall under the Central Bank rules!
A lot of people don't realise that. For example, moving your mortgage from an expensive provider to a new lower-cost provider to save money is a pure switch. For a pure switch of your home mortgage, it may not be necessary to have an 80% LTV. However, the banks themselves have rules and generally 90% LTV is the maximum loan size achievable.
Speak to use if you are looking at switching. AM Financial has improved the financial position of clients through mortgage switching and equity release.
Ok, surely that's enough rules?
You might have thought so. But lenders also have to ensure that mortgages are affordable to their customers. It needs to be shown that their customers can still service the mortgage even if interest rates were to rise by 2%. These are often called "stress tests".
For example, one of the lenders has a "proven repayment ability" test. Essentially it tests whether borrowers have proved they can repay a mortgage before they get it. For example, if a client has been paying monthly rent of €1,500, saving a regular monthly amount of €1,000, this is a monthly commitment of €2,500.
This is strong evidence, for example that a mortgage of €2,000 is affordable to the client. The test itself is formalised by comparing the track record of payments to a "stressed" mortgage payment. Again - the stressed mortgage payment is the mortgage payment that would result from interest rates increasing, usually by 2%.
Please - no more !
A common test amongst lenders is to ensure that net income of the borrower (after payment of this stressed mortgage!) is deemed sufficient. Lenders typically have minimum disposable income requirements which vary across lenders. The minimum disposable income is the amount that is left for spending after all financial commitments are met.
It is higher for a couple than for a single person. And it is also higher depending on how many children you have !
Are there any tips?
If you are struggling on stressed mortgage payment tests : A way to pass is to choose a fixed rate mortgage with a fixed period of at least 5 years. The stressed tests do not apply in such situations. However, to discuss whether this may be suitable, you really should discuss with us. We will find the best mortgage to suit your situation. We will generally find the lender who is the best fit for you.