Taking out a mortgage

Introduction

If you are buying a home, you will probably have to take out a mortgage, which is a long-term loan to finance a property purchase. If you cannot get a mortgage from a commercial lender (bank) you may be eligible for a loan from a local authority. As your home will be secured against the loan, you must keep up your payments or risk losing your home.

This page outlines some things to consider when thinking of taking out a mortgage, topping up an existing home loan or switching to a different mortgage product – known as a switcher mortgage. This information is aimed at private individuals who are buying their own homes.

Note that mortgage interest relief is no longer available for new mortgages. However, if you are a first-time buyer, you may be entitled to claim First Time Buyers’ Relief, which is a refund of Deposit Interest Retention Tax (DIRT).

Help-to-Buy incentive

An income tax rebate, the Help-to-Buy (HTB) incentive, aims to help first-time buyers of newly built homes to fund the deposit required. It also applies to once-off self-build homes. It is a rebate of income tax paid over the previous 4 years. It will run until the end of 2022.

Mortgage approval

Commercial lenders (banks) offer a range of mortgage rates and products. Before starting to look for a home, you should check with potential lenders to get a statement of how much they are prepared to lend you. This is called approval in principle. Getting approval in principle will indicate what price range you can consider when looking for somewhere to buy.

However, approval in principle doesn’t mean that the lender has approved a mortgage and agreed to lend you this amount. The official mortgage approval is contained in a letter of offer, which the lender will only issue when it is fully satisfied with certain matters, including a valuation of the property you are buying.

Mortgage lending limits

There are regulations that set limits on the amount banks are allowed to lend you to buy a home. These regulations were brought in by the Central Bank in 2015 and have been amended a number of times.

The regulations include loan-to-income (LTI) and loan-to-value (LTV) limits. They also outline the flexibility that lenders have to make exceptions to these limits. These are all described in detail below.

These limits apply to most housing loans including equity release and top-up on an existing mortgage. But, they do not apply to switcher mortgages, or to the restructuring of mortgages in arrears or pre-arrears.

How the limits work

There are 2 types of limit:

• Loan-to-value (LTV) is based on the ratio of the size of the loan to the value of the home you want to buy
• Loan-to-income (LTI) is based on ratio of the size of the loan to the income(s) of the borrower(s)

In general, you will have to meet both of these limits for your mortgage to meet the Central Bank’s requirements. The lender must also assess each loan application on a case-by-case basis – see ‘Assessment by the lender’ below. The regulations do allow lenders to be flexible in some cases – see below.

Loan-to-income limit (LTI)

There is a general limit of 3.5 times gross annual income for all new mortgage lending for principal dwelling homes, with some scope for flexibility. This includes lending to people in negative equity who are applying for a mortgage for a new property. This limit does not apply to buy-to-let mortgages.

Lender flexibility on LTI limit

Under the Central Bank rules lenders have the flexibility to exceed the LTI limit of 3.5 times income in:

• Up to 20% of the value of mortgages to first-time buyers
• Up to 10% of the value of mortgages to second and subsequent buyers

Loan-to-value limit (LTV)

There are different LTV limits for different categories of buyer. Again, lenders have some flexibility – see ‘Lender flexibility on LTV limit’ below.

If you are a first-time buyer of your primary residence, a 90% LTV limit applies on the full value of the property. This means you will need a 10% deposit for your house or apartment. This LTV limit has applied since 1 January 2017.

For non-first-time home-buyers, there is a limit of 80% of LTV on new mortgage lending, whatever the value of the property, so you will need a deposit of 20% of the total purchase price.

For properties that will not be your primary residence, including buy-to-let properties, a limit of 70% LTV applies.

The LTV limits do not apply to borrowers in negative equity applying for a mortgage for a new property. However, lenders may still opt to apply stricter lending standards, based on their assessment of each case.

The valuation of the property must have been carried out no later than 4 months before the date of the mortgage agreement.

Lender flexibility on LTV limit

In a calendar year, lenders can exceed the LTV limits for up to:

• 5% of the value of new lending to first-time buyers for primary residences
• 20% of the value of new lending to second and subsequent buyers for primary residences

The limits are described on the websites of the Competition and Consumer Protection Commission and the Central Bank.

Assessing a mortgage offer

It is very important for you to be satisfied that the mortgage is affordable from your point of view and that it is sustainable – you need to be able to keep up the repayments over the lifetime of the mortgage.

Information about the loan offer

Your lender must provide you with specific details about the mortgage offer including:

• How long the offer will be valid for
• Contact details of the lender or their representative
• Main features of the loan, including potential risks
• Type and duration of credit
• Full details of borrowing rate(s) and when and how they may be revised, if applicable
• Total amount that you will pay over the lifetime of the mortgage

This information should be set out in a European Standardised Information Sheet (ESIS). This is required under the European Union (Consumer Mortgage Credit Agreements) Regulations 2016. For a full specification of the ESIS and instructions on what it must contain, see Schedule 2 of the Regulations.

You can use the information in the ESIS and other sources to assess your mortgage offer.

Other sources of information

Information on the various types of mortgage is available on ccpc.ie, along with a set of mortgage calculators that you can use to work out your monthly repayments and the effects of a rate change.

You should work out your income and expenditure and assess how they are likely to change over time, depending on your employment situation, your family situation and your stage in life. You can use these budgeting calculators as a starting point.

Financial advice

You may want to get financial advice. The Competition and Consumer Protection Commission (CCPC) has information about the different types of finacial adviser that are available, as well as the questions to ask and steps to take when shopping around for financial advice.

Do your mortgage research

You’ll need to do your research and ask some questions about the loan and its implications over the long term, such as:

• How does the interest rate (APR) compare to others in the market?
• What is the lender’s policy and track record on changing interest rates. Even a small variation in interest rates can have a large effect on the overall cost of your mortgage. You can use this mortgage rate calculator to assess the impact of changes in interest rates on your repayments.
• Can I realistically afford to keep up the monthly repayments if my income falls or my outgoings increase? You need to assess your continuing ability to repay as circumstances change over time.
• If I accept an introductory offer, will I be able to manage when the ‘introductory’ period is over? Again, you need to calculate your ability to repay – over the full term of the mortgage, not just the first few years.
• What insurance do I need on the mortgage? Read about insurance protection on mortgages.

Assessment by the lender

In addition to the Central Bank’s lending limits, its Consumer Protection Code 2012 requires all regulated lenders to assess your personal circumstances and financial situation thoroughly before agreeing to offer you a mortgage.

The lender must carry out detailed assessments of the affordability of the product being offered and of its suitability for you. When offering you a mortgage, the lender must give you a written statement, setting out the reasons why the mortgage product being offered is considered suitable for your needs, objectives and circumstances.

The European Union (Consumer Mortgage Credit Agreements) Regulations 2016 also require lenders to conduct a creditworthiness assessment prior to offering a mortgage loan.

Paying the mortgage

Once you have taken out the mortgage, you are now committed to paying the monthly instalments as agreed in the contract with your lender. You should keep all correspondence and documentation from your lender in a safe place, as well as documents relating to insurance on your mortgage, house and contents.

It is very important to keep up your mortgage repayments. If you don’t, your credit history will be affected and your home will be at risk.

Problems paying the mortgage

If you are having difficulty managing your finances, there are several things you can do. The Money Advice and Budgeting Service (MABS) can help you to review your income and your outgoings, make out a budget and deal with your debts in general.

Even if you have not yet missed a mortgage payment, you are protected by the Central Bank’s Code of Conduct on Mortgage Arrears if you contact your lender and let them know that you are having a problem.

To discuss these and other options, you can call the MABS Helpline at 0818 07 2000 (9am – 8pm, Monday – Friday) or email helpline@mabs.ie.If you find yourself in serious mortgage arrears, you can contact Abhaile for free mortgage arrears support.

SOURCE https://www.citizensinformation.ie/en/housing/owning_a_home/help_with_buying_a_home/paying_for_a_home.html