Minding your money

Times have changed and prudence is the order of the day with lenders now insisting on first-time buyers having deposits of at least eight per cent before they issue a mortgage.

Some banks offer loans with a loan to value (LTV) rates of 92 per cent, but the lower your LTV, the better it is for three key reasons: if you have a big deposit saved, you prove to yourself and your bank that you can afford the mortgage; you will be protecting yourself to some extent against future property price falls; and lenders offer the best rates to those with lower LTVs.

Banks also like to see a record of regular savings or rent payments (or preferably both) through your bank account for at least six to nine months ahead of granting you a mortgage. This is the best way to demonstrate that you have the capacity to make your mortgage repayments. If you’re living at home with your parents and making a contribution to the household, make it formal and set up a standing order as evidence of your regular payments.

Make sure your bank account is operating in credit or within its overdraft limit. And if you have any other loans or outstanding credit card balances, pay these down as far as possible as outstanding borrowings will impact on the amount you can borrow for your mortgage.

“In assessing mortgage applications we want to ensure that customers have enough left over each month to enjoy their new home,” says Aine McCleary, head of mortgages at Bank of Ireland.

It’s important to do your homework before you go looking for a mortgage.

Don’t just think in the here and now. Think about the future and tweak your income accordingly. So what would happen if you lose your job? Or you start a family and have to cover the cost of childcare, not to mention all the other costs that come with having a child?

As a general rule, you shouldn’t spend more than a third of your income servicing a mortgage and that is your net income rather than what you get before tax. So if you are part of a couple earning a combined take-home salary of €4,000 per month your mortgage should not be more than €1,350. You will also have to take into account other costs, such as home insurance, life assurance and interest rate changes. If your new home is an apartment or a house in a serviced development you will also have annual service charges. Banks stress test an applicant’s ability to repay a loan at the current rate of interest plus a couple of points and you should do the same. For every quarter of a point rates go up, the monthly cost of servicing a €100,000 mortgage goes up by about €15 although the actual amount depends on many factors including the term.

As a rule of thumb, though, this isn’t bad. So if you have a mortgage of €200,000 and interest rates go up by two per cent you would need to find an additional €250 a month after tax or just under €3,000 each year.

While interest rates seem stable right now it is always worth bearing in mind that things can change.

And they can change quickly.