Q&A Dominic Coyle
Should I buy or keep renting?
I am trying to weigh up whether I should continue renting in Dublin or try to buy my first home instead. I pay €450 in rent per month sharing a two-bed city centre apartment. I am single, 30 years old, earn approximately €55,000 per annum and have €10,000 in savings. Realistically, how much should I borrow and is it a good time to make the leap?
Mr D.H., email
I’m glad you included that word realistically at the end of your query. What’s possible and what’s sensible are two very different things.
There are all sorts of things to consider – and many of them have nothing to do with how much you can get financially.
The first thing to note is mobility. You’re a young man in an uncertain economic and employment market. More relevant, it may be that the best way of advancing your career is a move abroad.
Mobility is important in those circumstances and renting helps in that regard. If you find yourself tied down by a mortgage, you may find yourself having considerably less flexibility to avail of opportunities that arise – or address unexpected challenges in your personal finances.
You also need to consider what, if any other financial commitments you might have – car loans, outstanding personal or student loans etc. These all eat into the affordability issue for mortgages.
Finally, there is the property market itself. Prices have undoubtedly come down dramatically in the past five years. And, in some places, like parts of Dublin, it is true that prices are now bottoming out or even rising. But part of that is certainly down to lack of supply. With prices in freefall, very few people have chosen to put their properties on the market in recent years unless they have had to.
There does seem to be more action in this year’s spring market, but it will be a while before we see what effect that has on prices.
In addition, the impending new regime on insolvency – alongside legislative change to overcome the current logjam on repossession (particularly of buy to let properties) – is likely to lead to a glut of properties on the market and that could well see prices dip again, if only temporarily.
If, after all that, you still want to buy, the biggest constraint on you would appear to be your savings.
Banks are adopting a much more rigorous assessment of affordability these days and at the most will lend only 92 per cent of the value of a home – and even then they will be very choosy who they deal with. Any blots on your credit copybook, like missed payments on previous loans or arrears on utility bills – could be enough to see a mortgage application turned down, or a higher deposit demanded. They will also examine your current finances rigorously. And if you do not have a permanent employment position, getting a mortgage at all will be really tricky.
As in the boom, there appear to be no hard and fast rules but it seems that lenders will certainly not lend more than a multiple of four to five times your salary. Some will look to lend no more than a percentage of your net disposable income, generally no more than 40 per cent.
And even then, they will stress test your ability to pay into the future. This is critical with European Central Bank rates currently rattling along at historic lows. If you are looking at a 20-35 year mortgage window, the certainty in the medium term is that rates will rise and the banks are obliged by the regulator to factor that into your application. Stress tests generally look at your ability to pay if interest rates rise by, say, two percentage points.
Variable mortgage rates are rising anyway and any rise in ECB rates will certainly be passed on. A two percentage point rise, over time, would significantly increase the amount you would be paying.
OK, so let’s get down to figures. On the basis of your salary, you could probably get a mortgage for close to €250,000, meaning you would be in the market for properties up to €275,000.
At the most competitive market variable mortgage rate of 4.24 per cent and using your full repayment period of 35 years, that would mean monthly repayments of €1,131.
In terms of net disposable income, this is well within the 40 per cent threshold, allowing for your tax bill as a single person and a 5 per cent contribution to a pension. However, you will have noted that this calculation involves a deposit of around €25,000, far in excess of what you have.
With your €10,000 deposit, the maximum that anyone will lend you is €115,000, making your price target €125,000, which would certainly rule out large parts of Dublin anyway.
The cost of a mortgage of this scale over 35 years (the maximum they are likely to allow – and even then reluctantly), you are looking at monthly payments of €525.88 at the most competitive variable rate.
Only you can decide.
This column is a reader service and is not intended to replace professional advice. Please send your questions to Q&A, c/o Dominic Coyle, The Irish Times, 24-28 Tara St , D 2, or to firstname.lastname@example.org.