Cian Molloy asks financial advisers to bust misconceptions that surround applying for home loans
First-time buyers had little to celebrate last week, after the Economic Social and Research Institute said house prices may rise by as much as 20% over the next three years. It was quick to add that the market was not overheating, but for those stuck living with their folks or in rental accommodation that did little to quell the fear that they may never own a home.The institute pointed to the loan-to-value and loan-to-income restrictions set by Central Bank as reasons why the market wasn’t overheating. For the household on the average wage of €37,500, this is little consolation.
On top of this, first-time buyers fear that banks won’t give them a mortgage even if they are earning enough. There is some good news: many of these fears are unfounded. We spoke to financial advisers to dispel the myths about mortgages and how to qualify for one.
You can’t apply for a mortgage until you find a property you want to buy
That is the wrong way of doing it, says Leo Healy, of Finance First, in Clondalkin. “It’s very disappointing to go house hunting, find what you think is the home of your dreams and then discover you can’t afford it because the bank will only lend you half of what you need. Get your mortgage approval first, then start house hunting within your budget,” he says.
You need to have mortgage approval in place so you can move fast — in Dublin, the average time to sell a house is four weeks, so if you are not ready to go you will miss out.
Some lenders will require you to identify a property within your budget as part of the application process, says Loreto Moore, of Moore Mortgage Brokers in Donabate. Once you have loan approval in principle, you don’t necessarily have to buy that house.
It takes ages to get mortgage approval
If you have all your documentation in place, such as bank statements in good order, proof that you can afford the repayments and evidence that you have a 10% deposit, and the amount you want to borrow is 3.5 times your salary or less, you can get approval in just over a week, says Seán MacShéamais, of Brendan James Financial Services, in Galway.
“If you are making a mortgage application that is clean then it won’t take ages, but if there are problems or questions about your application there will be delays,” says Conleith Quigley, of Quigley Financial Services, in Wexford.
“You need to make a formal application with all your documents. Getting a reply from the underwriters saying that the bank is prepared to give you a mortgage will take about 10 days.”
You won’t get a mortgage if there is a record of online gambling on your current account
An occasional small bet once every couple of months won’t do you any damage, but if you are consistently betting large amounts of money that will be an issue, says MacShéamais.
“I wouldn’t risk it,” says Healy. “I have known civil servants with great jobs and good salaries be declined outright because they have had subscriptions to gambling sites.”
“Keep your current account tidy,” says Moore. “That means, for six months, you want no unpaid direct debits, no unauthorised overdrafts and no gambling accounts. Mortgages get declined because of online gambling.”
You can’t do any big spending in the six months before you apply for a mortgage
You can spend money, buy a car, go on holiday, and so on, says Healy. “As long as you can explain large items of expenditure, the underwriters are OK with that. What they want to see is a consistent pattern of you managing your money and being able to meet your commitments.”
Moore says you should be upfront about any issues with your Irish Credit Bureau report. “Let your mortgage broker know about it. If I know you missed a credit card payment four years ago, you should be able to account for that when you put in a mortgage application.”
If you don’t provide an explanation, a lender could refuse your application. The banks don’t see one missed credit card payment as “just a tenner”, they see it as a failure to meet your commitments, to keep your word, to do what you said you were going to do.
If you are self-employed it is almost impossible to get a mortgage
Not true, says Quigley. If you are self-employed you will need to show at least two, but probably three, sets of annual accounts.
If, after the recession, you are only getting back on your feet you might have difficulties. If you have had one bad year and then two good years, the banks will average that out and use that figure to determine your repayment capacity.
As well as accounts, self-employed people will need to produce their tax return and their tax assessment from Revenue, says Moore. The process is a bit more involved for self-employed people, but not much more so.
A 35-year mortgage is always the best option for first-time buyers
Not necessarily, says Healy. Thirty-five years is the maximum term for a mortgage. The advantage of a longer term is that your individual monthly repayments are lower, but the disadvantage is that you pay more interest so that the loan is more expensive in the long term.
“Generally, a 35-year mortgage is good for cash flow, because the repayments are lower,” says Quigley. “But you can always make top-up payments that will reduce the repayment period.”
It all depends on what monthly repayments you can afford, says MacShéamais. “I advise people to make sure they can continue saving after they have taken on a mortgage.
“It means they can make lump-sum top-up payments every two or three years to reduce the overall cost of the mortgage and the amount of time they will be making repayments, but also so that they can cope with any increase in mortgage repayments if interest rates go up.”
A fixed-rate mortgage is a fool’s option, because variable rates are so good at the moment
The advantage of a fixed-rate mortgage is that you know exactly what you will have to pay each month and you can budget for that, says MacShéamais.
“But you do pay a premium for that, because the banks will have taken out insurance with a counter party against any increase in rates and that is what you are paying for. Variable rates give you more flexibility — you can make top-up payments without having to pay a penalty.”
“Mortgage rates are low because European Central Bank rates are low, but they have to go up sometime,” says Quigley. “Rates will increase, so if you can get a good fixed rate for four years I would go for it.”