Thursday 22 June 2017

First-time buyers: How to get the best mortgage

With a surge in approvals and the return of bidding wars it pays to be prepared

By Tom Halliday
By Tom Halliday
Louise McBride

Louise McBride

First-time buyers are set to return to the property market in force this year - and fears that house prices are about to escalate are high. The recent change to the Central Bank's lending rules, which means first-time buyers no longer require a deposit larger than 10pc if borrowing more than €220,000, is encouraging many to get off the fence to buy property.

There has been a rush of first-time buyers applying for the help-to-buy scheme, which offers a tax rebate of up to €20,000 for those buying new homes worth up to €600,000, since the scheme kicked off at the start of this year. Furthermore, a surge in mortgage approvals towards the end of last year means that more first-time buyers are now in a position to buy.

"Mortgage approvals shot up in recent months," said John McCartney, director of research with Savills. "That may signify that many of those looking to buy a home were hanging on last year - to see what the Central Bank would do [with its review of the lending rules]. Now we are seeing a rush of those people getting their ducks in a row to enable them do a deal on a home."

The danger of any uptake in demand is that house prices could be driven up. "There is an element of fear out there that if you don't get on the property ladder now, prices will go up," said Michael Dowling, chairman of the Irish Broker Association's mortgage committee.

Indeed, bidding wars are making a return in sought-after areas, with house prices often being pushed up well above the asking price. "We've seen cases where sale prices have gone up 20pc over the asking price in sought-after areas of Cork and Dublin," said Joey Sheahan, head of credit with mymortgages.ie.

House price inflation is expected to be stronger this year than it was in 2016 - and this inflation is unlikely to be restricted to second-hand homes. New homes are typically sold in phases as different parts of the development or estate are completed at different times. "Properties in the subsequent phases of new homes developments could be sold at a higher price than those in earlier phases, depending on market conditions," said McCartney. "Sellers will always try to get the best price for their property."

It's important not to panic buy when it comes to property. However, should you wish to buy a home this year, get yourself organised now so you are in a position to buy before prices escalate - if they do. Getting the mortgage you need to buy your home is your first step. Here's how to do it:

Tidy up your finances

Banks go through your current account statements with a fine-tooth comb when you apply for a mortgage. Should there be any evidence in those statements of reckless spending, an inability to make ends meet, bad financial habits, or onerous financial commitments you're struggling with, you're likely to get turned down for a mortgage.

"Banks want to see that you're not simply living from one wage to the next," said Dowling.

So before applying for a mortgage, tidy up your finances - and start saving a reasonable amount of your earnings each month. "People are getting approved for mortgages - once they have their house in order," said Sheahan. "So before you apply for a mortgage, clear your credit card bills and overdrafts - and start saving. You need to do that for between three and six months before you apply for your mortgage - depending on the bank."

Tidying up your finances will boost your chances of qualifying for the maximum mortgage you would normally be entitled to.

Break the Central Bank's lending rules

First-time buyers are likely to be up against aggressive bidding wars and stronger house price growth this year. So it may be worth investigating if you can break the Central Bank lending rule which prevents you borrowing more than three-and-a-half times your income (known as the loan-to-income rule).

The Central Bank allows some exemptions to its lending rules and should you qualify for one, you may be able to borrow more than three-and-a-half times your income. Should you do so however, be sure you are comfortable with- and can afford to repay - the mortgage you are taking on. "Once you meet the Central Bank's loan-to-value rule, you may be able to seek an exemption to its loan-to-income rule and so borrow up to four times -or maybe even four-and-a-half times - your income," said Sheahan.

The loan-to-value rule determines how much of a deposit you need to buy a home because it restricts your mortgage to a percentage of the value of your home.

Get the cheapest mortgage you can

Shop around lenders and choose the one which gives you the cheapest interest rate over the lifetime of your mortgage - as opposed to the bank offering the best financial 'sweetener', (such as a mortgage cashback offer or free legal fees).

Otherwise, your mortgage could cost you tens of thousands of euro more than it needs to. AIB and KBC offer the cheapest variable mortgages to first-time buyers borrowing 90pc of the value of their home - though you must have a current account with KBC to get its lowest variable interest rate. You will be repaying your mortgage for most of your working life so secure the cheapest mortgage you can and choose a lender with a track record of treating its borrowers well.

Line up your insurance early

You will struggle to get a mortgage if you can't secure mortgage protection insurance and home insurance. Mortgage protection insurance repays your loan should you or your partner (if it is a joint mortgage) die before it is paid off. Home insurance usually ensures that you can afford to rebuild your home if it is destroyed - such as by a fire for example.

Many people don't think about insurance until the mortgage is about to be drawn down - and the house purchase is about to close. This is a mistake. Should you run into difficulty getting mortgage protection insurance or home insurance, it is very likely that the mortgage will not be able to be drawn down - and that the house purchase will fall through.

You could for example find that the house you want to buy is uninsurable because it is in an area deemed by insurers to be a flood zone. Should the property be more than a century old, you could struggle to get insurance from a mainstream insurer.

You could find it hard to get mortgage protection insurance if you have been recently diagnosed with a serious illness - or have had such an illness all your life. You could also get turned down for the cover if you have medical conditions such as depression or diabetes or if you're leading a lifestyle which might concern an insurer - such as being a heavy drinker or smoker. Even if you are quoted for mortgage protection insurance, your premium could be loaded so much that you simply may not be able to afford it.

A bank may allow you to take out a mortgage without having mortgage protection insurance if you are over 50, buying an investment property, or if you cannot get insurance.

"This is all very much at the discretion of the bank though," said Dowling. "A bank may take a death-in-service benefit which you have in work into account if you can't get mortgage protection insurance. That death-in-service policy can't be assigned to the bank but it would give the bank some comfort that some life policy is there. If you have an existing personal life policy in place, the bank may also take that on board."

Have your mortgage protection insurance and home insurance in place a few days before the house purchase closes. Your lender will not allow you to draw down your mortgage until you provide it with evidence that you have bought the insurance. There are often delays with the close of a house purchase so the final closing date can often be unclear - or a lot later than initially expected. However, having your insurance lined up or ready-to-go from early on will save you a bit of stress as you close the deal on your home.

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