Ambitious plan to buy bigger home might be a step too far

Q&A: Dominic Coyle answers your personal finance questions

 

We bought a two-bed apartment in 2013 as a family home at the beginning of the recovery so the price was good – €135,000. It would now be valued at around €350,000 and we will be mortgage free in the next few months.

I tried to switch the mortgage in 2018 to get cash back and reduce the rate I was paying – currently 3.6 per cent – with Permanent TSB but the bank said no because I was the only one working as my wife was long-term sick at that stage.

I decided to forget about switching and instead save and pay off the mortgage earlier.

Now, it is going to be mortgage free. I work in the public sector with annual gross income in the region of €44,000. I reduced hours last year for parental leave but I can always work them if I need the money. My wife is now getting €5,500 from invalidity plus another €1,200 annual from another injury she had some years ago. We have three kids.

And I am going to continue to be saving around €20,000 annually.

I would like to buy a bigger property and I would like to know how much could I borrow. My plan is to have around €40,000 next year in savings. I want to rent the apartment. Rents are around €1,700-€1,800 at the moment in the area.

Mr G.L., email

I think you’re going to struggle here despite your very impressive savings record – at least if you intend to hold on to your current home.

Putting aside an extra €20,000 a year to pay off your mortgage ahead of time on a family income of around €50,000 is some going. You have effectively paid off a full mortgage in just eight years.

But, as you discovered when you tried to switch in 2018, banks have been very cautious for some time on what they will sanction. In large part, this is because they are still recovering from the apocalyptic losses they suffered in the financial crisis.

As you say, the fallout from the property crash meant you were able to acquire your current home at a very competitive price but the banks were at that time coping with a lot of people who had bought in the Celtic Tiger years and could no longer pay their mortgage loans.

Permanent TSB and others are still dealing with some of those losses and have sold other loans at a deep discount to other companies simply to get the bad debt off their books.

When you were looking to switch, you had two thoughts in mind from what you say in your letter – securing a lower interest rate and getting some cashback. But at the time, as you said, your wife was sick and had been for around a year.

The upside for you is that you work in the public sector so there is some reassurance for any lender about the security of your income

I can see why your wife’s illness and inability to work would give the lender pause for thought. Impressed as they would have been by your loan payment and savings record, any uncertainty like the prospects for your wife returning to work would be a red flag. Most lenders would tend to long-finger an application in those circumstances until a more settled view of long-term income became available – either because your wife returned to work or it was confirmed that she would not do so for the long-term and what the costs involved in any care for her would be.

And cautious as they were back in early 2018 when you tried to secure the switch, they are even more risk-averse now with large portions of the population either out of work, on wage support or working in areas of the economy where there is very significant uncertainty about the medium-term prospects.

In your own case, it has now been confirmed that your wife will not return to work and she is now on a long-term invalidity payment as well as some annual income relating to a previous injury.

The upside for you is that you work in the public sector so there is some reassurance for any lender about the security of your income. Equally, there is now clarity about the long-term, albeit reduced income of your wife.

Central Bank rules

But you are still likely to be constrained by Central Bank rules on mortgage lending. They stipulate, among other things, that you can borrow only 3.5 times your income. With a family income of around €50,000, that would limit you to a mortgage of €175,000.

You say you are currently working reduced hours under parental leave and could scale back up to full-time hours. I am not sure if the income figure you gave me is for the reduced hours or the full-time one but, either way, it seems you would be limited to a mortgage of between €175,000 and €200,000.

Yes, there is scope for limited exemptions from those rules but, even if granted, this would hardly suffice to bring any loan up to a level that would allow you upsize from a €350,000 two-bedroom home to a larger one to better suit the needs of your growing family.

And while the banks will certainly be impressed that you have found €20,000 a year in savings – or €20,000 over your existing mortgage commitments even better – to accelerate mortgage payments, they will not accept that you will be able to generate the same savings going forward.

Rental income

Nor are they likely to give you credit for anything approaching the €1,700 to €1,800 a month you expect to receive in rental income on your current home.

In the first place, there is no guarantee that the apartment will be rented all the time. Even in the current frenetic rental market, there are regularly gaps between one tenant leaving and another moving in.

There are also costs that would be incurred in maintaining the apartment and paying things like management charges, insurance, legal fees for drawing up contracts and estate agent fees in connection with renting it out, etc. And that’s before you pay tax on what’s left.

That’s not to say you should just give up.

I would suggest you approach a mortgage broker who can make the best case for you on the basis of your family income and what might reasonably be expected in net rental income and savings.

I suspect, however, that to move into your larger family home, you may have to cash out of the apartment. That would give you a clear €350,000 – or close to it after expenses incurred in selling – as you will have no mortgage outstanding on it and no tax bill as it is your family home (principal private residence).

Along with a mortgage of €175,000, and the additional savings of €40,000 you expect to have by next year, that would give you a minimum pot of €565,000 to purchase a new home. And given that the loan you would get would be well under 60 per cent of the value of the new home, you would be in line for the most competitive rates on the market.

As of now, that is 1.95 per cent which is available from Avant. This is a fixed rate and that will limit your option to accelerate payments. Avant does not yet allow additional lump sum payments though it expects to do so shortly. Rival Finance Ireland does allow one-off payments each year of up to 10 per cent of the outstanding value of the loan.

So you certainly have the resources to buy the bigger family home you want. the only question is whether you can find a way to do so while holding on to your current home as an investment. I don’t think you will, but don’t just take my word for it: get professional advice from a mortgage broker.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into

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