Some first-time buyers are getting their mortgage wrong, and it’s costing them. Stiff competition for homes means being laser focused on getting a loan offer, and fast. However, getting the wrong mortgage could leave you in the wrong house, in the wrong location and on the hook for more debt than necessary.
Your mortgage is going to shape your finances for decades to come, so here are the top 10 things you need to get right.
1. Shop the market
So, you have “your” bank – your salary goes in and your bills come out. Sticking with the same bank for your mortgage, however, could be a costly mistake.
“All first-time buyers want at that moment is mortgage approval. They can think all banks offer the same deal. Not shopping around is the biggest mistake they can make, in my view,” says Margaret Barrett, managing director of Mortgage Navigators.
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Can you name 11 banks? That’s how many mortgage lenders there are in Ireland right now, all with different underwriting policies and rates.
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“There are banks available only through brokers that are not available to customers on the high street and some of those banks have better deals than Bank of Ireland, AIB and PTSB,” says Barrett.
Mortgage interest rates vary from 2.98 per cent to a whopping 6.15 per cent at the moment. Use a mortgage broker to shop the market for the best offer for you, and avoid paying needless extra interest.
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2. Know your real budget
A squeeze on housing is pushing prices out of reach, but some first-time buyers are shrinking their options further because their bank is underestimating their income.
How much a first-time buyer can borrow is limited to four times income. If you have variable income, like bonus, commission, overtime and shares, you need to use a bank that recognises the value of it. Not all do.
“A lot of clients work for Google, Salesforce, and LinkedIn and they get stock – this is a massive part of their salary,” says Martina Hennessy of mortgage broker Doddl.ie. “If you have variable income, the income you are allowed to multiply by four is key to how much you can borrow, and that can vary greatly.”
Some banks give more weight to variable income – this can add tens of thousands to your borrowing capacity, widening the choice of homes you can afford.
Take the example of a tech worker earning €70,000, with €14,000 in annual bonuses and €25,000 in vested stock. Their borrowing limits range from €308,000 with a pillar bank, taking 50 per cent of bonus into account, and €405,000 with a more flexible lender, allowing 90 per cent of bonus and 75 per cent of the value of the stock, says Hennessy. That’s a €97,000 difference.
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Approval to borrow more can enlarge your house search parameters – you could end up in a different house in a different area.
“You can end up with an extra bedroom that you can rent out, that can really turn the dial on your repayments,” says Hennessy.
3. Stay put, and stay consistent
If variable income is a big part of your pay, moving jobs could cost you.
“For some workers, their variable income, like commission, can be the same as their basic income – it can be huge,” says Hennessy.
But if you can’t demonstrate you have earned the commission or variable income with the same employer for three years, the bank doesn’t want to know.
“If someone earns commission and they move jobs, say from Salesforce to LinkedIn, for example, this variable income can’t be taken into account.”
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Get your mortgage first, then you can move jobs all you like.
And if you earn bonus, overtime or commission – are these payments recurring? Lenders often want to see a six- to 12-month track record of payments if you are including them in your repayment-ability calculations.
4. Go short if you can
Just because you can lower your monthly repayments by spreading them out over 35 years doesn’t mean you should. Going shorter on the mortgage term, if you can afford it, can save you tens of thousands of euro.
“Don’t set 35 years as your default position,” says Hennessy. “You are probably already in a position where you can afford more,” she says.
With rents averaging €2,350 a month in Dublin, according to Residential Tenancy Board figures, for many who were saving for a deposit too, the monthly mortgage repayment on their new home is likely to be a much lower amount.
Yes, after years of scrimping to buy, it would be nice to have a bit extra every month, but the extra can get gobbled up on lifestyle spending. Put it towards your mortgage instead and you’ll be better off in the long run, paying less interest on your borrowings.
The average first-time buyer mortgage approval level is just over €330,000. Taking a very average rate of 3.5 per cent with repayments over a 30-year term, the repayment would be €1,482 per month.
“If that applicant repaid over a shorter, 25-year term instead, their repayments would be €1,652 per month, so a monthly differential of €170,” says Hennessy.
“The difference in interest, however, over a 30-year term, if the interest remained the same, would be €194,460 versus €158,757 over 25 years. That’s an interest saving of €35,703 by opting for the shorter term.”
Ask yourself if you can afford to pay the extra €170 more a month now to save over the longer term and pay off your mortgage quicker.
“If you do end up trading-up down the line, you’ll have much more equity in the home and you’ll have paid much less interest too,” says Hennessy.
5. Public-sector workers
If you’re a public-sector worker, or you are buying a house with one, where you get your mortgage will have a serious impact on how quickly you can afford a home, says Barrett.
“ICS mortgages, for example, will go five points up the salary scale for a public-sector worker, whereas most of the traditional pillar banks will go just one or two points up,” she says.
This increased flexibility comes with ICS’s Flexi IO rate, where owner occupiers pay only the interest on the loan in the first two years, but must take out a five-year fix.
In joint mortgage applications where the public servant is not the main earner, ICS will assess their income five points up their pay scale.
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Where both applicants are public-sector workers, the bigger earner will be assessed at three points up the salary scale, and the secondary earner at five points up.
By contrast, MoCo and Nua will lend two points up the salary scale, while Avant will lend one point higher. PTSB and Bank of Ireland don’t offer the feature. AIB will also go three points higher, says Michael Dowling of Irish Mortgage Brokers.
Public servants should note that while the ICS’s Flexi rate does enable them to borrow more, their mortgage will be more expensive in the longer run due to the interest-only start. However, they could switch to another lender after five years.
6. Shop till you drop
After you go “sale agreed”, it can take months before the sale closes. So even after you go sale agreed, keep an eye out for a better rate, says Barrett.
“You could get approval in principle or a loan offer today with a bank who might have the best interest rate right now, but up to three weeks before drawdown, you can change your lender.”
It can take more than 10 weeks between when a property is “sale agreed” and contracts are signed, and another five weeks or more between the signing and the close of the sale, according to Ipav figures. That’s almost 16 weeks.
You’ll understandably be nervous of tinkering that far into the sales process, but a new loan offer can be issued within seven to 10 working days, says Barrett.
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“If another bank comes with a cheaper rate or a better product, a good broker will get it for you.”
“Up to three weeks before drawdown, there is still enough time to switch,” says Barrett.
7. Futureproof
The average age of a first-time buyer is 36 – this can be a busy and expensive life stage.
“The affordability of your mortgage can fluctuate in the future if your life circumstances change,” says Barrett. “It might increase in affordability, but it might also decrease. There might be unpaid leave from work, one of the applicants might decide to stay at home for a few years, so it’s about understanding your future affordability too.”
Yes, going shorter on the mortgage term will save you interest, but one good reason to go long is your future life plans.
If you do max out your mortgage term, you can always reduce it later, or switch to another lender.
8. Can I overpay?
By how much can I overpay the mortgage? In the heel of the house hunt, it’s not a question many first-time buyers think to ask.
The facility to overpay varies by bank, and this can significantly affect the overall cost of your mortgage.
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Some mortgages allow over payment of 10 per cent of your monthly direct debit, for others it’s 10 per cent of your mortgage principal, says Barrett. Other mortgage providers allow overpayment of 20 per cent of your mortgage principal.
If you get a sales bonus every quarter, for example, the facility to knock chunks off your mortgage can make a significant difference to paying it off faster with less interest.
“That overpayment facility is really important. Sometimes one that allows overpayment of 10 per cent of your direct debit might have the cheapest interest rate, but the mortgage with the higher interest rate is actually the better product because the overall cost of the mortgage will be less with that overpayment,” says Barrett
9. Do-er upper money
Ex-rental properties, probate sales – the majority of homes sold are second hand. Yet, apart from the vacant property refurbishment grant, first-time buyers get no government help to buy second hand.
If you find a house that needs work, don’t be put off. You might be able to include the do-up cost in your mortgage, says Hennessy. Understanding this can widen your property search.
“You can borrow to renovate a property when you buy it.”
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Take a first-time buyer approved for a mortgage of €450,000, based on an expected purchase price of €500,000. They find a house for €450,000, but it needs €50,000 worth of work.
As long as the finished value of the home is €500,000 (or more), and the loan-to-value stays at or under 90 per cent, your mortgage could finance both the purchase and the renovations. You’ll need a detailed breakdown of renovation costs from a contractor, and an estimated post-renovation value from one of the bank’s approved valuers.
The bank will release the mortgage funds for the purchase, and then release the renovation funds in stages as the work progresses when you provide the right certificates, according to Doddl.ie.
10. Don’t get complacent
Once they get the keys, first-time buyers can make the mistake of never looking at their mortgage again. You might be punchdrunk from the house hunt and mortgage process, but getting complacent will cost you.
Review your mortgage interest rate every two or three years, says Barrett.
If you chose a three- or five-year fixed rate to start, you will roll off on to a variable rate after the fixed period expires. This will make your repayments more expensive, unless you act. This is a prime time to not only switch rates, but switch banks too.
“You could be saving tens of thousands by switching your mortgage,” says Barrett. “If you term-ed it out to run to 35 years, that is a really prime opportunity for revising your term as well.”
