Banks ease open door to a mortgage
The number of mortgages issued has increased for the first time since 2006, so what do you need to know about applying for funds?
Looking at recent mortgage statistics, it would appear that the property market is finally showing tentative signs of life. Over the course of the third quarter, almost 4,000 new home loans were issued, representing a 10 per cent jump on the same period in 2011.
While overall drawdown levels are still at vastly reduced levels, the most recent period marks the first time since 2006 that the number of new mortgages has risen.
It would be sensible not to read too much into these statistics, but they do give clear evidence that banks are lending again.
But, if you’d like to be one of those 4,000 buyers or so making their mark in the next survey, what do you need to know about getting a mortgage to buy a new home? And which bank are you likely to get it from?
Can I get a mortgage?
The first thing to remember is that getting mortgage approval is not an exact science.
Just because one bank might turn you down, it doesn’t hold that all the other banks will too. Some are lending more actively than others.
In general, you will need to show that you hold a steady job in a steady sector with income from a “sustainable source”; have a good credit history; have the proven ability to service repayments as evidenced by regular savings/rent payments, etc; and aren’t over-burdened with debt.
And how much can I get?
In times past, banks would consider an application for a mortgage based on a multiple of your income.
Bank of Ireland, for example, says it will loan up to 4.75 times gross income but the reality is that the banks are paying far more attention to disposable income than to overall salaries.
In this regard, it’s all about “repayment capacity”. Even if you have income of €80,000, if you have numerous debts or essential expenditures, these will severely hinder your chances of getting a loan.
You need to show the bank that, after outgoings, you have reasonable net disposable income each month.
KBC Bank, for example, will require a couple with two dependent children to have income of €2,500 a month left over after they service their debt, while if you’re single and applying with Permanent TSB, you would need to have around €1,600 per month, or at least €2,500 if you’re a couple.
And a higher requirement may apply for higher earning applicants.
Danske Bank applies a debt servicing ratio (DSR) and looks for candidates whose debt repayments account only for up to 40 per cent of net income.
If you take home €5,000 each month, your debt, including mortgage repayments, should not exceed €2,000 per month.
You’ve passed the first few steps, and your application looks good.
But will it stand up to the stress tests currently being applied?
The banks are now stressing applications at an additional two percentage points, which means that if you’re likely to be paying a rate of 3.8 per cent on your mortgage, the bank will want to make sure you can repay it even if rates rise to 5.8 per cent.
While you might be able to afford monthly repayments of almost €1,400 on a €300,000 mortgage over 30 years, will you be able to stomach €1,760 if rates should shoot up?
Get out from underwater
They have been particularly slow in coming but there are now signs that, finally, borrowers are being offered negative equity mortgages.
This means that, if you have considered yourself, heretofore, “trapped” in your apartment or house, there is now a solution.
However, as with everything else in the mortgage market at present, banks will cherry pick the best clients. And there are also restrictions.
For example, the highest LTV you can get is 175 per cent, which means that the total amount you borrow cannot exceed the value of your new property by more than 75 per cent.
This means that, if you currently live in an apartment valued at €185,000, but you have a mortgage outstanding of €300,000, if you sell, you bring negative equity with you to your new home of €115,000.
If you buy a new home, which is on the market for €375,000, with a down payment of €50,000, the value of your new loan, as a proportion of the value of the house, would be 117 per cent. So the 175 per cent limit is quite generous and should facilitate many buyers.
In addition to the LTV limit, however, banks will typically apply a value limit. At Permanent TSB, for example, the total value of your new loan cannot exceed €550,000, while at AIB the maximum loan allowed is €700,000.
And there are also some quirks. At Permanent TSB, for example, you will only get such a mortgage if you are trading down to a smaller property, while at AIB, the new property needs to be of greater value than your current one.
If you are currently on a cheap tracker in your own home, you can forget about bringing that with you.
The banks will impose new lending rates should you succeed in getting such a mortgage.
But the real stickler is that you will typically need to sell your current home before being deemed eligible for such a mortgage.
For those in apartments outside of the main urban areas, such an option will just not be available.
How about a short sale?
If you simply want to get out from the burden of your home, and buying another property is the last thing on your mind, some banks might consider a short sale.
AIB, for example, says it will facilitate customers who wish to sell their property at the open market value, and then enter an arrangement for full payment of the residual debt.
This is likely to take the form of a personal loan.
Danske will also consider it, but “available customer cash-flow” will be its main criteria.
Buying at auction?
If you have been perusing the brochure for the latest Allsop Space property brochure, you might have come across a property you’d like to bid on.
But if you don’t have the full cash amount, can you get financing for the purchase?
Well, in principle, the answer should be yes.
Banks like Bank of Ireland, KBC and Danske indicate that they do lend for auction purchases, provided you get a valuation of the property, and have mortgage in principle approved before you bid.
Given that bidding at an auction is a legally binding contract, you would want to make sure your “approval-in-principle” will stand up should you be successful at the auction.
Be sure you have already provided the bank with all the documentation they might require – sometimes approvals don’t get as far as mortgage drawdowns.