How to get in financial shape for a home loan
While the banks are loosening their purse strings and providing home buyers with more mortgages, nevertheless buyers are being asked to produce credible evidence that they can afford to repay a loan.
So before applying for a mortgage, buyers should prepare their application and consider the key factors of affordability, their borrower profile and credit history as well as the amount of deposit.
To determine affordability the lenders will look at a borrower's net disposable income (NDI), allowing for their net monthly income but deducting their new mortgage repayment.
However, the new mortgage repayment will typically be based on the lender's standard variable mortgage interest rate plus 2pc (ie. the stressed rate) to allow for interest rate increases.
Most lenders set a minimum NDI of €2,500 per month for a couple in order to gauge their ability to repay. Benefits such as children's allowance and mortgage interest relief (TRS) are not factored in here thus the recent abolition of TRS has had no major bearing.
A borrower profile includes assessment of the applicant's employment and in particular its permanency, length of service and the strength of the employer and employment sector in which the applicant works.
For example, if your company has recently had to make staff redundant this can have a negative impact on your application.
The basic salary plays a key role in the assessment while the amount of commissions and bonuses allowed is very small.
Lenders rely heavily on credit history and missed payments on previous loans can adversely affect the application.
Typically the deposit which a buyer needs to pay themselves ranges from 8-10pc of the house price based on the maximum mortgage available of 90-92pc of the purchase price.
The days of 100pc mortgages are very much in the past!
We would see the following as some key tips for a successful mortgage application:
• Plan ahead
• Get an indication of how much you can borrow.
• Keep records of savings and rents paid for at least six months before applying as these will indicate the monthly amount you can afford in mortgage repayments. For example, monthly savings of €650 plus rent of €800 shows you can afford repayments of €1,450 per month which would currently equate to a mortgage of c.€240,000.
• Avoid missed payments, referral charges, constantly being overdrawn.
• Avoid short-term loans or credit-card debt where possible.
• To confirm your credit history check with the Irish Credit Bureau (www.icb.ie).
• To secure access to the full mortgage market use an independent adviser.
As well as being able to afford mortgage repayments, also remember to budget for adequate mortgage protection and house insurance costs.
In addition to saving for a deposit, also remember to save for upfront transaction costs such as stamp duty, legal fees, valuation/ survey fees and other costs.
Proper presentation and packaging of your application, taking on board the above tips, gives you the best chance of securing a mortgage in 2013.
The number of residential property transactions in Ireland increased by 34pc to 24,249 in 2012, according to information on the new property price register with Dublin seeing a 46pc increase.
This trend is likely to continue in 2013 with anticipated gross new mortgage lending expected to be in the region of €4-€5bn which is a big increase on the 2012 output of circa €2.5bn.
The good news appears to be that the banks are lending again. The two pillar banks AIB and BOI both have targeted in the region of €2bn each for new mortgage lending in 2013 and PTSB have recently announced a serious return to the market.
While these numbers are still minute compared with the boom years they do at least show a greater appetite amongst both lenders and buyers to partake in the property market again.
Liam O'Connor is a consultant with Irish Mortgage Corporation. To find out more attend one of the mortgage seminars being hosted by Irish Mortgage Corporation www.irishmortgage.ie