Friday 21 November 2014

Good financial practice earns trust to secure a mortgage

The stress test is more rigorous than ever, but thinking about what you spend and how you spend it can go a long way towards getting a loan, writes John Cradden

John Cradden

Published 27/03/2014 | 02:30

Bank statements

provide crucial evidence

that lenders will need

WHILE there are signs that banks are lending to first-time buyers again, experts agree that the mortgage application 'stress test' – demonstrating your ability to repay the mortgage – is a good deal more rigorous than before.

"While someone might easily qualify for a mortgage based on their salary, if they spend every cent that they earn and are putting nothing away for savings or rent then the banks will not be happy to give them a mortgage," says Kevin McNerney, director with Dublin-based First Rate Financial Planning.

With any mortgage approval, a typical lender stress test will factor repayments at the current applicable interest rate plus an additional 2pc or more.

For instance, the stressed repayments on a mortgage of €250,000 over 30 years would be a little less than €1,600 a month, so you need to show you can put this aside every month.

"You can also prove it by the payment of monthly rent, not in cash but through the bank, so that it's traceable," says Wayne Sheridan of Shankhill Financial Services.

Most people will have a combination of both rent and savings to show this, he said.

Needless to say, bank statements will provide almost all the crucial evidence that lenders will need, as they can give a clear pattern of your finances, particularly if you tend to use a debit card a lot.

As well as looking at evidence of repayment and savings put by, lenders will pick up on any evidence of impulse spending, large credit card balances or even things like online gambling.

"One or two little paddypower.ie transactions or whatever wouldn't be anything serious, but if you have 15 transactions in a month over six months then, yeah, that would be an issue," said Mr Sheridan.

"Similarly for credit card usage. If you have €3,000 on a credit card, and the balance wasn't reducing enough before an application, that's not great."

Others advise giving things like online gambling a miss altogether.

"Where a person has online gambling transactions, even if it is only €10, the banks will not be happy to see them," says Mr McNerney.

"They will then look to see if there is a pattern where there may be three or four transactions on the same day to the same company and, if this shows up, then they will not be happy to offer a mortgage."

You will also be advised to rein in any big impulse purchases or discretionary over-spending linked to lifestyle, such as restaurants, bars and nightclubs.

"Again, they will not be too concerned about this if a person is saving a good level each month and living within their means through their current account,"says Mr McNerney.

"However, if this lifestyle spending is being done while there is little or no savings then the banks will look to see that is reduced dramatically for six months before reviewing the case again for a mortgage."

Banks will also raise eyebrows at accounts that are constantly overdrawn, "as it gives the impression you are not able to manage your day-to-day living expenses". A definite no-no is any unpaid cheques, standing orders or direct debits to be seen.

But why six months, and is it long enough?

"The reason people are told to look good for six months is because that tends to be how far back an underwriter will look into your current accounts," says Karl Deeter, compliance manager at Irish Mortgage Brokers.

"They may look back further on savings accounts that build up over time, by asking for annual statements, or into your Irish Credit Bureau which keeps information for six years, so the six-month rule is only for one part of your application. Other parts go deeper and other parts less so."

But even if you don't use online gambling, have unpaid items littering your bank statements, make big impulse purchases or even believe you have any bad financial habits to declare (at least for a six-month period), you'd be surprised at the things on a statement that might weigh heavily against you in the mortgage approval court of opinion.

"I'll never forget the person who seemed to have off-licence sales on their account almost every day, but it turns out it was a shop with an off-licence attached and the card machine made his eggs, bread and milk look – on the statement at least – like alcohol purchases," says Mr Deeter.

"Make your accounts easy to interpret. Remember, the underwriter will never meet you."

Going through all this stuff with your mortgage broker or bank can also be a timely tonic for many applicants to tidy up their financial habits and keep them that way even well after they get their hands on the keys to their new homes.

"As a broker, we can go through other aspects of their finances at the same time, and so, yes, financial habits can be formed," says Mr Sheridan.

Irish Independent Supplement

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