The big mortgage questions
05 Sep 2010
Before you take the plunge and buy a property, it is vital you take all mortgage options into consideration
Houses that once seemed financially unattainable are now with in the grasp of many potential buyers. But can buyers purchase the property they want, or has a tighter lending environment once again pushed cheaper properties beyond the reach of would-be borrowers?
Banks face a balancing act these days - lend too much and they’re accused of lack of prudence; lend too little and borrowers criticise the tightness of credit. It’s a struggle to lend just the right amount.
Lending volumes have plummeted, partially due to a reluctance by borrowers to return to the market. But another factor in this dramatic fall-off in loan amounts is that banks are fussier about who they lend to.
The latest mortgage market report from the Irish Banking Federation (IBF) and PricewaterhouseCoopers showed that more than 7,800 new mortgages worth a total of €1.31 billion were issued during the second quarter of 2010.This represents a drop of almost 40 per cent on lending volumes a year earlier.
According to the report, first-time buyers remain the most resilient type of purchaser and represent the largest segment of the - albeit much reduced - mortgage market. First-time buyers accounted for 38 per cent of all loans drawn down in the second quarter of this year, with the average first-time buyer borrowing less than €200,000.
Who is most likely to secure a loan?
Everybody knows somebody who has been turned down for a loan. But just what are banks looking for? And what raises a red flag on a loan application?
The strongest candidates are those employed on full-time contracts,’’ said Frank Conway, a director of the Irish Mortgage Corporation. ‘‘A big problem at the moment is that a lot of applicants are not on fulltime contracts, so cannot get finance approved.”
The lower your outstanding debt, the better your chances of securing a mortgage. Such debts will reduce the amount you can borrow and, in the case of someone with large, outstanding debts, could be a stumbling block for a mortgage.
So tackle personal loans, car loans and credit card balances before applying for a mortgage.
Karl Deeter, of Irish Mortgage Brokers, said banks were keen to see savings of at least 10 per cent of the purchase price for a deposit. He said that mortgage applicants also needed to show savings to cover other costs, such as legal fees and fit-out costs. Saving or paying rent equivalent to the proposed monthly mortgage repayment is a plus.
Does your choice of property affect your chances of securing a loan?
Banks are very aware of the need to manage risk in their mortgage book. Part of this relates to the repayment capacity of borrowers, but another factor is the soundness of the asset. Put simply, a bank does not want to lend money for a property that has little value and does not offer good security for the loan.
As a result, certain property types attract stricter lending terms, such as a requirement that borrowers have a larger deposit. Small apartments, especially those in rural locations, are the most affected.
‘‘There is a growing problem with some lenders in the apartment sector,’’ Conway said. For example, Bank of Ireland has reduced its maximum LTV to 85 per cent for apartments outside major cities.
How large a deposit do I need?
Gone are the days of 100 per cent finance. Now the best on offer is 92 per cent, meaning you need to save a minimum of 8 per cent of the cost of your home. Based on an average first-time buyer loan of €200,000, that means you need €16,000 before you even knock on your bank’s door. And don’t forget that you need savings for other costs - and a little excess for future rainy days.
AIB, Bank of Ireland and National Irish Bank provide 92 per cent finance. With Irish Nationwide, Ulster Bank and EBS, you can borrow up to 90 per cent of the cost of your home. However, this drops to 80 per cent with Ulster Bank if your current account is at a rival bank.
Permanent TSB lends up to 90 per cent of the purchase price for qualifying first-time buyers, or 85 per cent for those trading up. With KBC, you need a deposit of at least 20 per cent of the purchase price.
What will banks consider when judging mortgage applications?
When a bank looks at your mortgage application, the focus is on ensuring you have the financial capacity to repay the loan.
‘‘Loan requests are considered on the basis of proof of income, financial status and demonstrated repayment capacity,” said AIB’s spokesman.
To pass muster, you need to provide adequate documentation to prove you can afford to repay the loan. ‘‘A minimum of three months of up-to-date current account statements are required, going back a maximum of six months, confirming satisfactory account conduct,” said Permanent TSB’s spokeswoman.
National Irish Bank requires 12months of bank statements for customers who are new to the bank.
If your parents give you a gift to help bulk up your deposit, some banks require a letter to say that the gift is non-refundable. For example, Ulster Bank requires the person making the gift to execute a deed of waiver. Typically, self-employed mortgage applicants will need to supply two or three years of accounts to verify their financial position.
How do banks determine what they will lend?
Banks use a variety of methods to determine how much you can borrow. Some look at your net income, while others work from multiples of salary.
Regardless of which calculation applies, all lenders will stress-test your proposed repayments to ensure they remain within your means if interest rates increase or incomes decline.
‘‘Maximum income multiples range from four to five times income, depending on income level and applicant type,” Bank of Ireland’s spokeswoman said. The maximum income multiple falls to 4.75 times total income for a joint application.
Permanent TSB bases its calculation on net income. ‘‘Proposed and existing loan commitments should not exceed a predetermined percentage of net monthly income, typically 35 per cent,’’ a spokeswoman said.
AIB also applies a 35 per cent of net income rule, while National Irish Bank will not allow borrowings to exceed 40 per cent of net income.
Ulster Bank judges applications on income multiples, debt service ratio and net income criteria.
‘‘Applicants must pass all three affordability tests to qualify,” a spokeswoman said.
Are there any restrictions on loan size and term?
Your maximum potential loan is driven by the bank’s loan-to-value (LTV) criteria, which dictate the percentage of the total property price you need to stump up.
However, some lenders also specify a minimum mortgage amount.
Also, when it comes to mortgage term, lenders typically apply additional criteria if the term chosen means you will be repaying your mortgage after retirement.
With Permanent TSB and National Irish Bank, a minimum mortgage loan of €20,000 applies while, for AIB, it’s €25,000. KBC offers a minimum loan amount of €32,000 over ten to 35 years, providing the borrower is no older than 70 at the end of the term. With EBS, the maximum loan term is also 35 years.
Ulster Bank will lend between €50,000 and €1.5 million, with terms extending up to 40 years.
What is the interest rate?
The interest rate you pay will vary considerably, depending on a number of factors. Most lenders differentiate between new and existing customers, with many offering special introductory deals for first-time buyers.
The amount you borrow, the term of your loan and whether you fix your rate or not all play various parts in determining the interest rate that you will pay. Bank of Ireland has a one-year fixed rate of 3.4 per cent for first-time buyers, while its standard variable rate for existing customers is 3.5 per cent.
Fixed rates start from 3.6 per cent for existing customers. Standard variable rates from AIB are tiered based on LTV, and range from 3.13 per cent upwards. The bank also has fixed rates that start from 3.33 per cent.
Ulster Bank is offering a lifetime discounted rate of 3.1 per cent for certain home buyers, while its standard variable rate for existing customers is 3.9 per cent.
Permanent TSB is offering a standard variable rate of 4.6 per cent for new customers, while the bank’s fixed rates range from 4.3-4.7 per cent, but are available only to new borrowers with an LTV of 50 per cent or less.
For existing borrowers, fixed rates of 4.9 per cent and upwards apply.
KBC offers a standard variable rate of 3.92 per cent for existing customers, while fixed rates start from 3.98 per cent. For new customers, a two-year discounted variable rate of 3.75 per cent applies.
First-time buyers can fix for three years at 3.7 per cent with Irish Nationwide, while existing customers would pay 3.9 per cent to fix for the same period.
The mutual offers a standard variable rate of 3.4 per cent.
National Irish Bank applies the same rates for new and existing customers, with variable rates starting from3.2 per cent, and fixed rates of 4.17 per cent and upwards. EBS is offering new customers a standard variable rate of 3.9 per cent, with fixed rates starting from the same level.
If you do decide to fix your interest rate, different terms are available. Permanent TSB will allow you to fix for up to ten years at a rate of 6 per cent. With KBC, the longest fixing period is five years and a rate of 4.39 per cent applies.
Bank of Ireland and AIB will also go to ten years, while Ulster Bank and National Irish Bank will not fix beyond five years.
Note that all interest rates quoted refer to annual percentage rates (APR)
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