How much income will banks look for when considering my mortgage?

Q&A: Plan to rent a room or set up home office unlikely to increase mortgage offer

Can I get any tax deduction from using a third bedroom as a home office? I would consider sharing the home office with the person in the second bedroom as well. Photograph: Cyril Byrne

Can I get any tax deduction from using a third bedroom as a home office? I would consider sharing the home office with the person in the second bedroom as well. Photograph: Cyril Byrne

 

I’m currently living with my parents and trying to save a deposit to buy a home. I am self-employed and have a lot of flexibility in terms of where I work.

In looking at properties to buy, my plan is to try and get either a two-bed, where I will rent out the other bedroom under rent-a-room relief, or a three-bed, where I will also rent out the second under rent-a-room relief and use the third as a home office.

Will mortgage lenders take into account my plan to have income under rent-a-room relief when they are determining borrowing limits?

Also, can I get any tax deduction from using a third bedroom as a home office? I would consider sharing the home office with the person in the second bedroom as well. I am aware that I can get a deduction for a portion of the cost of broadband, electricity and heat from working from home. My query is more in relation to a notional rent/lease costs of using the third bedroom as a home office. Considering that the use of a third bedroom as a home office would not impact principal private residence status for capital gains tax, I would understand why a deduction might not be available.

Mr ML, email

With property prices rising the way they are amid tight supply, it’s no wonder that people are getting creative in trying to maximise their income or relief to increase their chances of persuading a bank to lend them enough to seal the deal. However, the rules are fairly tight and the banks – for all their glossy ads – are absolutely risk-averse at the moment.

That’s hardly surprising as they are still trying to offload soured loans from the last property crisis but it is little consolation to people like you who are looking to buy their first home.

Lenders are interested in only one thing: whether you can make your repayments.

For people like you who are self-employed, they will generally want to see two years of filed accounts to get a picture of your earnings

The Central Bank has also imposed mortgage rules to ensure people do not overexpose themselves to financial risk. The Central Bank rules state that, in general, banks can only lend you 3.5 times your salary and 80 per cent of the value of the property. This rises to 90 per cent for first-time buyers like yourself.

There is some scope for “exceptions” but the banks are limited in how many of these they can grant. Most tend to be used up early in the year.

Strict criteria

Outside these strict rules, banks will want to see evidence of sensible money management over recent years (ie bank statements with no evidence of arrears or unsolicited borrowings) and evidence of earnings. They will check your credit history.

On the earnings side, things are easier for those in PAYE employment who will need wage slips and confirmation they are in permanent employment rather than on probation, contract work etc. For people like you who are self-employed, they will generally want to see two years of filed accounts to get a picture of your earnings.

Lenders will have different rules on how they assess earnings but, on the issue of “variable income”, all will be more conservative in their approach than the average borrower would like. You will not get full recognition of bonuses, commission or contract payments, and, for those in PAYE employment, overtime.

Essentially, unless it is guaranteed income, it will be viewed with a somewhat jaundiced eye.

While there is no doubting your best intentions, it is not certain that you will be able to rent a room in this new home

If that is the case with income you have actually secured, it will come as little surprise that lenders will be even more risk-averse on the subject of projected income – such as from your plan to rent a room in any new home.

Renting a room

It’s a good idea and banks will undoubtedly be pleased to see you are actively ensuring that you can meet your mortgage commitments . . . but they are not likely to give you any credit in your mortgage approval for income that you do not currently have.

To be fair, while there is no doubting your best intentions, it is not certain that you will be able to rent a room in this new home, or that you will be able to rent it without gaps that would undermine repayment capacity on a loan.

Whatever about getting some credit against such income if you were switching mortgage down the line, or reorganising – when there would at least be a track record that the bank could assess – I’d be surprised if any mortgage lender would agree a mortgage now on that basis.

Home office

In relation to the home office, I’m not confident that you would be able to charge for the rent of a room in your home as office space.

The Revenue Commissioners do set down areas they consider allowable. If a company provides office furniture and equipment, such as computers and ancillary equipment, telephone/broadband etc for an employee in the home, they do not attract benefit in kind even where there is also “incidental private use” as long as the items are supplied primarily for business use.

You’d want to be persuasive in arguing with Revenue that you only acquired the larger home for its office potential.

Even if it was allowed, there would be an impact on the principal private residence (owner-occupier) relief against capital gains tax when you eventually sell the property.

What should be available to you as a first-time buyer – assuming you buy a newly built home – is the Help to Buy incentive. This allows you to claim back income tax and Dirt (deposit interest retention tax) paid over the four years prior to the home purchase up to a maximum of €30,000 or 10 per cent of the property price, whichever is the lesser.

As you have been saving already, Help to Buy may help you bridge the gap between what your current earnings will secure in a mortgage and what you are looking to raise.

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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