Applying for a mortgage often isn't as much hassle as you might think and by knowing about these eight things the process should go even smoother.
1. The Central Bank’s mortgage lending rules
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 the loan-to-income rule, means you can only borrow up to 3.5 times your annual income.
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.
Need help with saving for a deposit? Here's six tips to help you get your deposit together.
2. How repayment capacity affects your application
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 avoid at all costs taking on any new debt in the months leading up to your mortgage application.
3. Your length of employment
The days of long-term employment with the same employer 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 process but the bank won’t approve it until they have confirmation from your employer that you’ve passed probation. So changing job right before you want to apply for a mortgage usually isn’t the best idea.
4. Referral fees
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.
A referral fee is when a bank goes to take out a direct debit from your account and there isn’t enough money to cover it. Referral fees can be as high as €10 and are a common reason why people’s mortgages get rejected.
In some cases a bank might charge you the fee and waive the direct debit through (as they’ll know from your behaviour that money should be hitting your account again at a later date) so sometimes people mightn’t realise how serious the issue is: “The bank still processed the direct debit and they got their money the next day, right?” Well wrong. When it comes to applying for your mortgage any type of referral fees 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 towards your application.
5. 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 one to three years but they can go up to a maximum of 10 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 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
6. Mortgage protection
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. 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.
And the good news is that bonkers.ie now compares life insurance. Get a quote online here in just minutes.
7. The extra costs with getting a mortgage
There are 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.
8. 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 get you 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!