Almost a year on from our first lockdown, the impact of Covid-19 still overhangs the mortgage market. Whether you're looking to buy your first home, switch mortgage or trade up, the pandemic means it can all be a bit more challenging.
Getting a deposit together
Let’s start with the positive first. As Liam O’Connor, sales director with Irish Mortgage Corporation points out, one of the upsides of the past 12 months is that people’s ability to spend has been severely curtailed as a result of the pandemic.
“So if you planned last year on having a deposit in 12 months’ time, you might be much closer to it now,” he says.
And with the average mortgage for first-time buyers now at about €225,000, according to the Banking & Payments Federation of Ireland, it means a typical first-time buyer will need about €25,000 for a deposit, and potentially significantly more in Dublin.
Thanks to the opportunity for increased savings, some would-be buyers are now increasing their budgets.
"There's so much money in this country," says Martina Hennessy, managing director of Doddl.ie.
Having more of a chance to save will have been particularly useful for those looking to trade up, given that second and subsequent buyers need a deposit of at least 20 per cent to buy again.
While typically, the release of equity in the original home, built up as a result of paying down the mortgage and rising house prices, can be used to fund this 20 per cent deposit, it will depend on when the first home was bought.
Another advantage is that Help to Buy was extended in October's budget, which means first-time buyers have until the end of the year to avail of a tax rebate of up to €30,000, or 10 per cent of the purchase price on a new home.
Impact of wage subsidies
It caused some consternation last year when banks announced that they would not consider applications from prospective homebuyers who were benefiting from pandemic State supports such as the pandemic unemployment payment (PUP) and the Temporary Wage Subsidy Scheme (TWSS), subsequently replaced by the Employment Wage Subsidy Scheme (EWSS).
Not much has changed for those whose are relying on such payments, or whose employers are. This is despite Minister for Finance Paschal Donohoe arguing last summer that "participation in the wage subsidy scheme should not be a reason for treating an applicant in a different way".
When it comes to the PUP, potential applicants should expect a straight no.
“If on PUP, income cannot be taken and the banks in general would need to see two to three months of consistent income proven on return to payroll,” says Hennessy.
For people who are self-employed drawing the PUP, the requirements will be greater, with Hennessy noting that, once off the PUP, they will in general have to provide six months record of trading to ensure figures are back to pre-Covid levels.
So the general advice for someone on the PUP is to “sit tight” until they’re back at work for a few months.
When it comes to the EWSS, it may not be “a complete no”, says O’Connor. The EWSS replaced the TWSS back in September and is due to end in March although may be extended further.
“There is no blanket ruling on this: it’s on a case by case basis, and specific circumstances will come into it,” he says, adding: “The concern the lender has is whether that business has the ability to trade through the current Covid position, or will the mortgagee be out of a job in relatively short period of time, or suffer a salary reduction which will impact on his or her ability to pay their mortgage?”
While the TWSS was printed on pay slips, the EWSS is not. However, O’Connor says you will need to disclose when applying that you are benefiting from the scheme. And in any case Revenue publishes a list of employers who have availed of this subsidy, so the information is publicly available should the lender wish to check.
It may also come down to the extent to which you’re benefiting from the scheme. The subsidy is not available to those earning €76,000 and over a year, which may give some scope to get around the restrictions.
As Hennessy notes, some banks will ask on the salary certificate “Is your income supported by the EWSS?”, while others will ask “Is your employer in receipt of the EWSS?”.
If you’re earning €76,000 or over, you will be able to say no to the first question. This could help with your application. Other lenders may only allow the portion of income that is not subsidised to be allowable for assessment.
Another way of getting around EWSS restrictions is if you only need to borrow less, such as only 50 per cent of the purchase price, as the risk to the lender would be less. Of course this won’t be an option for many.
Once your employer comes off the EWSS however, you will be in a better position. But should you wait six months to apply for a mortgage?
No, apply “the minute your employer is off it”, suggests Hennessy.
Even if your company is not benefiting from the EWSS, it may have nonetheless been hit by the pandemic; and this could also affect your application, as lenders shy away from sectors such as tourism.
One potential applicant told this newspaper back in November that, despite having had no impact on their salary, EBS had blacklisted them nonetheless for a mortgage simply because they worked for an airline.
If you are engaging in the mortgage approval process, remember your income will be checked at every stage of the process – “for approval in principle, before you complete, and right before you draw down,” says Hennessy. So there is no scope to hide anything from your lender.
Remember, when buying a home you should always ensure that your solicitor includes a subject to funding clause in the contract, which allows you to hold onto your deposit should the bank renege on its mortgage offer. This is always important, but particularly so given the current uncertain economic circumstances.
A Covid bonus
If you were lucky enough to received a bonus over the past year, you should expect a lender to factor this into their calculations.
“A lender will take a bonus if you can show you’ve been receiving it for last three years, and there will be further comfort if you received it in a Covid year,” says O’Connor, noting that lenders will typically allow up to 50 per cent as part of your assessment calculations.
So, for example, a combined salary of €100,000, plus a bonus of €20,000, will give a total income of €110,000 for mortgage application purposes, which would convert to a potential mortgage of €385,000, based on a multiple of three times income.
Not paying your mortgage
When the pandemic hit, more than 100,000 homeowners found themselves unable to pay their mortgages. As a result, last March the banks introduced a three-month payment break, which was then extended by a further three months, ostensibly to aid those who had lost their income as a result of the pandemic.
The thousands of homeowners who still could not restart repayments at the end of this period came to longer-term agreements with their lenders, such as moratoriums or interest only payment periods.
But, as these homeowners go back to paying their mortgages again, there may be a fear that this period of non-payment could impact their future ability to trade up or switch their mortgage.
Crucially however, there is no adverse impact on homeowners' credit records as a result of availing of these breaks. This means that the breaks were not recorded with the Central Credit Register or the Irish Credit Bureau – although any inability to meet your full payments when the breaks expired might.
Covid supports will make it difficult to switch…
It’s a double edged sword; not only have mortgage rates become more attractive, but those impacted may need the relief of some extra money available to spend each month. However, those who have been impacted by Covid financially will find it difficult to switch.
This is because switching mortgage is akin to taking out a new mortgage. It means you will have to go through the whole mortgage application process in full. And if you have benefited from PUP, the TWSS or the EWSS, this could affect your application.
….but don’t let it stop you altogether
Yes, benefiting from a Covid wage subsidy such as the PUP or EWSS may preclude you from switching to another mortgage provider. It doesn’t, however, mean that you can’t switch to another rate with your current lender.
So, if you're one of the many homeowners paying the top variable rate – which is 4.5 per cent at Bank of Ireland and 3.15 per cent at AIB – there is plenty of scope for change. BofI, for example, offers a two-year fixed rate of 2.9 per cent, with a further 0.2 per cent discount for energy efficient homes, while AIB offers a low rate of 2.35 per cent over five years for similar properties.