“Want to go halves on a mortgage?” This tongue-in-cheek pick-up line on dating apps from millennials sums up a property market so unaffordable that house prices are now almost eight times the average salary.
A desperation among millennials to escape stratospheric rents meant the number of first-time buyers drawing down mortgages soared last year to levels last seen in 2007.
While the Central Bank’s revised macro-prudential lending rules, which enable first-time buyers to borrow up to four times their income instead of 3.5 times, kicked in on January 1, novice mortgage applicants face a perfect storm of other hurdles: the departure of Ulster Bank and KBC from the Irish market means fewer mortgage lenders to borrow from, banks are raising interest rates after five rate hikes by the European Central Bank, and high inflation means borrowers have less disposable income – prompting lenders to strenuously test their ability to borrow.
Indeed, lenders will put you through your financial paces if you apply for a home loan and, in this environment, they’ll expect you to spend like a monk and save like a miser.
But if you follow these tips when preparing to apply for a mortgage, you’ll have a significantly higher chance of securing loan approval.
You might have saved enough for a deposit for a property, but there’s no point eagerly attending viewings just yet: you’ll need at least six months to prepare for a mortgage application, says Joey Sheahan, head of credit at MyMortgages.ie and author of The Mortgage Coach.
“Applying for a mortgage is a big undertaking – and one which needs to start months before the application forms are even looked at,” he says. “You might only get one bite at the cherry with a lender, so it’s crucial you put your best foot forward.”
Check your credit history
Before you apply for approval in principle, namely a statement from a lender indicating the amount they are prepared to lend you (based on some initial eligibility checks), get a copy of your credit report. This report will show you if you missed any loan repayments you were not aware of over the previous five years or if it contains any mistakes.
You can apply for your credit report for free online at the Central Credit Register, which stores information on loans of €500 or more, at centralcreditregister.ie. The register will respond to you within 20 days of your request and there is a maximum period of 40 days within which your request must be answered. If report’s information is inaccurate, incomplete, or not up to date, you can add an ‘explanatory statement’ of up to 200 words about any information on the report, which is useful if there was a genuine reason for a missed repayment being recorded.
Your credit history needs to be spotless when applying for a mortgage – any blip usually means you’ll be rejected. If the report does show up any arrears, wait until your finances are more stable before progressing with a mortgage application, says financial adviser Carol Brick, who is managing director of CWM Wealth Management and HerMoney.
“I’d postpone my mortgage application until it’s clear,” she says. “If you are declined by a bank, they won’t look at you again for a while.”
Check your employment status
Because a lender wants to be sure your past income will continue into the future, it will look at whether you are in permanent employment or on probation. If you work on contract, they may require you to be employed for at least 12 months with the same employer or be in a second contract with the same employer.
“You’ll need to be a full-time employee for at least 12 months and provide three payslips, as well as a salary cert signed by your employer that outlines your basic pay and variable pay such as a bonus or commission,” Brick says.
Self-employed? File your taxes return early
If you work for yourself or run a business, you’ll have to jump through extra hoops to secure mortgage approval. But you’ll have a better chance of success if you can provide a lender with up-to-date tax returns, certified accounts, and tax clearance certificates. Some lenders will use your average income for two years and others will want three years of accounts. Even if you’re not due to file your returns for 2022 until October 31, get it done now.
Save as much as you can
It’s not enough to show a lender that you have saved for a 10pc deposit – your bank statements must demonstrate you have the capacity to save a set amount of money every month.
“Often you’ll have to cut outgoings in other areas of your life to ensure you have enough set aside for savings,” says Trevor Grant, Chairperson of the Association of Irish Mortgage Advisors. “Try not to deviate from your budget. And unless it’s an emergency, try not to dip into your savings.”
Get rid of your debt
Clear your loans entirely, or at least have as little outstanding as possible, to show you can afford mortgage repayments, Brick advises. Banks will particularly examine rolling debt like credit cards, so pay off your entire balance every month. Even if you have an authorised overdraft, don’t use it or your odds of getting a mortgage diminish rapidly. Cash advances on credit cards – even on holidays – is another red flag to your prospective lender, Sheahan says.
Your bank statements will be scrutinised by your prospective lender to assess not just your ability to meet financial commitments such as childcare but also for evidence of frivolous or erratic spending patterns. Resist the urge to make any extravagant purchases in the run-up to your mortgage application, and ease up on tapping your card in shops or buying products online.
“Any spending on unnecessary items will stand out like a sore thumb,” Brick says. “The banks want to see that you’re not spending your money in Zara every weekend.”
Ditch your vices
Otherwise squeaky clean mortgage applications have been scuppered by bank statements that show the occasional flutter with online gambling or regular spending in the pub.
“I’ve come across people who’ve closed down their gambling accounts for a year before their mortgage application,” Brick says. “You really do have to live like a monk. The lenders are looking for careful financial management; they want to know that if they give you half a million euro to buy a house in Dublin, they’ll get their money back.”
Lenders stress-test mortgage applicants to check if they could still meet repayments if interest rates were to rise by a further 2pc. However, even if you can cope with the increase in interest rates, the rising cost of living may be squeezing your disposable income, meaning you might not meet lenders’ living allowance requirements.
Because of higher inflation, many prospective borrowers have less money each month to cover larger mortgage repayments after paying for groceries, fuel and clearing household bills. As a result, some first-time buyers, particularly in cities – where property prices are more expensive – have found they are failing these stress tests or are not eligible to borrow four times their income under the looser Central Bank lending rules that were introduced at the start of January.
Sheahan recommends mortgage applicants ramp up their savings in the run-up to their mortgage application to ensure they can pass stress tests.
“Where we have seen people fall down – and will see more people fall down – on loan approval is their lack of proven ability” to meet mortgage repayments, he says. “Banks want to see a combination of a level of rent payments and savings. To get a mortgage of €300,000 over 35 years, you would now have to show an ability to pay €1,400 a month, whereas that figure last year would have been around €1,200 a month. That means you need to save a further €200 a month now to prove your ability to repay” a home loan.
Source: Gabrielle Monaghan
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