Applying for a mortgage takes time and preparation but by knowing these 10 important things the process should go as smoothly as possible.
As this is the final article within our eight-part mortgage application series, we have decided to examine 10 considerations you should bear in mind before starting your mortgage application process.
This in turn will help you along your mortgage journey and will ensure that you are not left blindsided by any surprises along the way.
1. The Central Bank’s mortgage lending rules limit how much you can borrow
Since 2015 the Central Bank of Ireland has restricted the amount that people can borrow in relation to their income and the value of the property they’re buying with its mortgage lending rules.
The first rule, the so-called loan-to-income rule, means you can only borrow up to 3.5 times your annual income.
However, in any one calendar year, 20% of mortgages that lenders give out to first-time buyers can be above this cap. For second-time and subsequent buyers, 10% of mortgages are allowed breach the loan-to-income rule. In these cases, often called 'exemptions', up to 4.5 times an applicant's income can be lent out in some cases.
The second rule, the so-called loan-to-value rule, limits the amount you can borrow in relation to your property’s value. It’s often simply called ‘the deposit rule’ and means first-time buyers need a deposit of at least 10% and second-time buyers 20%. So if you’re a first-time buyer who’s looking to buy a house for €300,000, the maximum the bank can lend you is €270,000.
Note again that there are exceptions or 'exemptions'. In any one calendar year, 5% of mortgages to first-time buyers can have a deposit below 10% and 20% of mortgages to second-time and subsequent buyers can have a deposit below 20%.
2. Having other loans will reduce the amount you can borrow
Almost more important than meeting the Central Bank’s lending rules is your lender’s repayment capacity rules.
In short, regardless of how much you borrow, your lender will want to ensure that your mortgage repayments aren’t more than around 30% - 35% of your net disposable income (NDI).
Your NDI is your income after tax, loan repayments, and alimony payments - if applicable - have been taken into account.
So if your NDI is €3,000 then your mortgage can’t be more than around €1,050 a month.
What this means is that having any outstanding loans can significantly reduce the amount you’ll be able to borrow as it reduces your NDI. So try to pay down as much debt as possible before applying for a mortgage and try to avoid at all costs taking on any new debt in the months leading up to your mortgage application.
3. The Help-to-Buy scheme is there to help with your deposit
Getting the money together for a deposit is easier said than done.
However, under the Government's Help-to-Buy scheme first-time buyers can now claim a tax rebate of up to €30,000 for the purchase price of a new-build or self-build house or apartment. This is up from €20,000 when the scheme first came into effect.
Interested and want to know if you qualify? Check out our in-depth guide on the scheme here.
In conjunction with the Help-to-Buy scheme, first-time buyers can also apply for the First Home scheme.
4. Cashback mortgages can help with your moving-in costs
Cashback mortgages have received a bit of a bad rap of late. And if you believed some you'd be forgiven for thinking they're some type of scam.
And while it's true that cashback mortgages tend to come with slightly higher rates, the cashback on offer can be invaluable to many first-time buyers to help with moving in costs or paying stamp duty.
There's also anecdotal evidence that many first-time buyers are using cashback mortgages to pay back the 'bank of mum and dad' who have perhaps helped towards the deposit, meaning these offers are often a key way for younger buyers to get on to the property ladder.
In short, there's nothing wrong with cashback offers per se, just don't get blindsided by them. Take the time to consider all your mortgage options and think about what is of most value to you.
5. Changing jobs right before applying for a mortgage isn't a good idea
The days of long-term employment with the same company are long gone and these days it’s common, indeed almost expected, for people to change jobs every few years.
Banks realise this and have relaxed their rules around the length of time you need to be with an employer before applying for a mortgage.
In the past it was usually two years. Now it’s generally the length of time for you to pass probation, which is generally six months in most jobs.
You can still apply for a mortgage during your probation period and start the application process but the bank won’t approve your mortgage until they have confirmation from your employer that you’ve passed probation. So changing jobs right before you want to apply for a mortgage usually isn’t the best idea.
6. Referral fees will negatively impact your application
When applying for a mortgage your lender will do a forensic-type audit on your current account for the previous three to six months. This is to ensure that you’re managing your day-to-day spending properly. And one thing they’ll be looking out for is any referral fees or unpaid item fees.
A referral fee is when a bank goes to take a payment from your account such as a direct debit or standing order, processes it, but there isn’t enough money to cover the payment so your account goes into a negative balance or unauthorised overdraft. Referral fees can be as high as €5 per payment and are a common reason why people’s mortgage applications get rejected.
An unpaid item fee is when a bank goes to take out a direct debit or standing order from your account and there isn’t enough money to cover the payment so it gets returned unpaid. The charge here can be up to €10 or more per payment.
With referral fees in particular people mightn’t realise how serious the issue is: “The bank still processed the direct debit and they got their money eventually, right?” Well wrong. When it comes to applying for your mortgage any type of referral fee will act as a black mark against your application.
So in short, it’s really important to only spend what you have in the months leading up to your application.
7. The difference between fixed and variable rates
A key decision once your mortgage has been approved is deciding between a fixed and a variable mortgage rate.
A variable rate is an interest rate that can change from time to time i.e. vary. It’s usually based on the European Central Bank’s main lending rate. This means your repayments can go up or down over the term of your mortgage.
A fixed rate, on the other hand, means that your interest and monthly repayments are fixed for a predetermined time, usually over three to five years but they can go up to a maximum of 30 years in Ireland right now. A fixed rate offers peace of mind because it means that your repayments definitely won’t go up in that time.
Unfortunately, your rate also definitely won’t go down which means you might miss out on lower interest rates and lower repayments.
With fixed rates, you’ll also usually be charged a breakage fee if you want to pay off a fixed rate early or switch to another lender. You also can’t overpay on your mortgage with most lenders. However, some now allow you to make an overpayment of up to 10% of your outstanding balance each year without being penalised.
Basically, if you’re committing to a fixed rate, it may only be worth it if you’re happy to stick to that rate and repayment for the agreed term.
Whether you chose to fix or vary will depend on:
- The value you place on stability and predictability
- Whether you think you'll want to increase your monthly repayments at some stage in the near future
- Whether you think you'll want to pay a lump sum off your mortgage at some stage in the near future
- Whether you'll want to switch mortgage at some stage in the near future
8. Mortgage protection is compulsory for almost everyone
Mortgage protection is a form of life insurance which pays off the outstanding balance on your mortgage should you die before the mortgage is fully repaid. It is usually compulsory for all mortgage holders in Ireland. So in short, if you haven’t got mortgage protection in place, then you can’t draw down your mortgage.
Many people make the mistake of only applying for mortgage protection after they’ve received mortgage approval and are frantically trying to close everything off and get the keys to their new home.
However, depending on your health and that of your closest relatives - your insurance company will want to know all about any genetic diseases in your family - the mortgage protection application process can sometimes be longer and more strenuous than the mortgage process itself. Countless times we’ve heard of people losing out on their dream homes because they couldn’t get insurance in place quick enough.
So start applying for your mortgage protection as soon as possible. Once approved your policy will remain in place for three months. See here for more info on the best time to apply for a policy.
9. There are extra costs to save for besides a deposit
Unfortunately, there are lots of other costs other than the deposit which you’ll need to save up for.
Solicitor's fees, a valuation fee, stamp duty and a surveyor's report all need to be paid for as well as land registry fees. It all adds up. And if you're moving into an apartment, you may need to pay several months of management fees upfront.
10. The estate agent isn’t your friend
This really bears repeating.
The estate agent acts for the seller and no one else. It’s not their job to tell you about any faults or issues with the property or to help you get a fair price. And many will do anything - perhaps even lie - to get the sale across the line.
It might sound tough but you’ll appreciate it if you’re ever selling yourself at any time in the future.
And never tell the agent what your max bid is. The less they know the better!
Check out our other mortgage-related articles
If you found this article informative, read some of the other guides within the mortgage Quickstart guide series.
- Take a look at our Quickstart Guide to get an overview of all the articles in our series.
- Find out how to compare mortgages on bonkers.ie here.
- Discover all you need to know about the mortgage completion process. Here, we outline all the steps involved in getting a mortgage from start to finish.
- In this guide, you will learn about how lenders assess your mortgage application.
- Here is a list of the different documents you need to submit when taking out a mortgage.
- Become familiar with 25 complicated mortgage terms you’ll encounter when applying for a mortgage.
- Uncover the most commonly asked questions by mortgage applicants today.
Start your mortgage journey today
When you decide that it’s time to apply for your mortgage, you can submit an online enquiry through our new mortgage broker service and one of our experienced financial advisors will call you back to get your application started.
You’ll be happy to hear that our mortgage service is entirely free and is fully digital from start to finish, meaning everything can be carried out online from the comfort of your home. And it's completely paper-free too!
Let’s hear from you
We hope this helped to clarify some queries you may have had about applying for a mortgage. However, if you do still have any questions, we’d be happy to help answer them!