A step-by-step guide to financing your new home
Finding the right home is only half the battle – you have to finance it, too. For most of us, that means a mortgage. To get one, do your homework.
The first thing any lender will look at is your income. “You will need proof of income in the form of payslips, a P60 or an income certificate,” says Lorna Gammell of Gammell Financial Services.
You will need an up-to-date payslip as well as those from the previous year. Self-employed people need a copy of their Form 11 and Chapter 4 tax returns for the previous three years.
Not all income is equal. Permanent and pensionable jobs remain the gold standard for lenders. While the three-year contracts in the IT sector are doing quite well, others in non-standard jobs will struggle.
Give yourself time to get your bank accounts in order. “Lenders will want to see your bank statements, for all of your accounts, going back six months,” says Gammell.
They are looking for evidence that you are handling them correctly. This means staying within your overdraft limits and making sure all of your standing order or direct debit payments are made on time.
If you haven’t already, save. “Banks like to see a savings history or a rental history. If you are saving, your money should be placed in a separate account and show no withdrawals, ”explains Gammell.
Sort your credit cards. Try to pay off any unpaid amount each month. Ideally, you shouldn’t be in debt, but with auto loans and other personal loans, “they’ll be looking for evidence that you’re good at paying them off,” she says.
Under the Central Bank’s mortgage lending rules, the maximum you can borrow is 3½ times your annual income. Lenders can provide up to 90% mortgage loans to the first-time buyer.
The exceptions to this rule, the much vaunted “exemption”, arise because each lender has the discretion to break these rules for 20% of their mortgage portfolio. A broker may push you to the lender, more often than not likely to say yes if, for example, he takes into account bonuses or travel allowances.
“Banks are allowed to lend outside the standard criteria in some cases. And each lender issues their own terms, which change throughout the year, depending on the funding available, ”Gammell explains.
The start of the year typically sees an increase in activity as borrowers seek exemptions before they run out, but that’s not a completely accurate assessment of how it works.
When a borrower approved by the exemption does not withdraw their funds within six months, the exemption is granted to another applicant. Since borrowers will often seek approval from more than one lender, a number will be reintroduced into the system throughout the year.
Brokers stay in close contact with banks and know exactly where each lender is at all times and who is best placed to lend. Only two would have been open to exemptions in January for example.
A waiver can earn you a higher loan-to-income multiple – up to 4½ times the income – or a higher loan-to-value ratio. However, the biggest obstacle to obtaining a mortgage for a first-time buyer is the deposit.
“The financing is there, the properties are there, but at the end of the day the typical first-time buyer is renting, so it’s hard to try to save money. Where previously people rented for a year and saved, they could now rent for three years before they could buy, ”says Gammell, who emphasizes the need to also factor in stamp duties and legal fees. “So a few thousand more must be saved. “
Receiving a gift from the so called Bank of Mum and Dad is great, but even if you do, “you still have to show that you have saved a certain amount of the deposit yourself, to show your good faith,” Gammell explains. .
Brokers also know which banks won’t approve you for an exemption until you agree to the sale, which some do, says Niall Coughlan of MMPI Financial Services. “It’s really a question of timing. A bank could be closed to exemptions one week and open the next. “
The trend towards fixed rate mortgages shows no signs of slowing down and rates are therefore competitive. Ulster Bank recently introduced a five-year fixed rate of 2.2% for mortgages with a loan-to-value ratio of 80% or less on property valued over € 300,000.
“It’s a really great rate,” says Wayne Sheridan of Smart Mortgages, who points out that different banks use different valuation tools. Some will consider family allowances as income, for example. “Some take a punitive view of child care costs while others wouldn’t,” he says.
The other decision to make is whether or not to opt for a cash back offer. A number of lenders, including Bank of Ireland, PTSB, and EBS, offer cash back offers, typically for around 2% of the direct debit. These are popular with first-time buyers because they can contribute to the cost of furniture, says Sheridan.
However, if you do go for one, it’s worth returning to the market to remortgage, or renegotiate, in five to seven years. “As a caveat, just be careful that your situation hasn’t changed significantly in the meantime, such as working part-time, quitting work, or having three children,” says Sheridan.
Mortgages: by the numbers
Financial assistance is available for first-time buyers. The purchase aid provides for a refund of income tax paid in the previous four years, to contribute to a deposit. It is open to first-time buyers of new properties, as well as to self-builders.
The Rebuilding Ireland Home Loan, available nationwide from local authorities, can be used to buy new or used property or to build it yourself and provides up to 90% of the property’s market value with a maximum loan of € 288,000.
You can also benefit from rent relief, on rental income up to a value of € 14,000, tax free. According to Ray Palmer Smith of Knight Frank, many buyers of two-bedroom homes in Taylor Hill in Balbriggan have purchased with the intention of doing so.
“The first phase was very appealing to young professionals looking to move up the property ladder and, because each bedroom has its own bathroom, the houses were designed to accommodate this. In addition to the young couples, we had a lot of single professionals who bought them in order to rent the other room to a friend, ”he says.