No two homebuying experiences are the same, but most buyers start in the same place: with questions. From qualifying for a mortgage to interest rates and fees, discover the answers to homebuyers’ most pressing mortgage questions.
1. What’s the difference between a fixed and variable rate mortgage?
When applying for a mortgage you’ll have the option to choose from a variable rate, a fixed rate or a combination of the two, known as a split rate.
With a variable mortgage, interest rates are subject to change. They could go up or down depending on a variety of factors, so might not be the best choice if you’re looking for ongoing stability. It’s important to note that variable rates offer more flexibility. They allow you to top up, extend or pay extra off your mortgage without having to incur any penalties. On the other hand, fixed-rate mortgages are more restrictive.
With a fixed-rate mortgage, interest rates and monthly repayments stay the same for a predetermined time. Fixed rates offer a sense of security as you know your rate won’t increase. However, they also mean you could miss out on lower interest rates. With a fixed rate, you’ll be hit with penalties if you wish to pay off some of your mortgage early, switch to a variable rate or switch lenders. It is important to note that most lenders allow you some overpayment facility on a fixed rate.
2. What are the Central Bank’s mortgage lending rules?
When applying for a mortgage you should be aware of the two main rules the Central Bank has in place.
- Loan-to-income limit For first-time buyers you can borrow up to a maximum of 4 times your gross income, or combined annual income if purchasing with a partner. For second-time and subsequent buyers, you can borrow up to a maximum of 3.5 times your gross income. This is derived from your base salary. Some variable income, such as commission and bonus, can be taken into consideration, but generally, this is a significantly reduced proportion. It should be noted that banks and lenders have the freedom to make exceptions.
- Loan-to-value ratio The loan-to-value ratio refers to the percentage of the property’s value that you can borrow and how much you are required to pay upfront in the form of a deposit. First-time buyers and second and subsequent buyers need to have a minimum deposit of 10%. Bear in mind that for second-time buyers, this 10% deposit can take the form of equity from selling your existing house. This does not need to be made up of new cash and can be useful if your existing house has increased in value while your mortgage has reduced through repayments. Lenders can also give deposit exemptions in some cases.
3. What documents do I need to apply for a mortgage?
When applying for a mortgage, most lenders will look for information in relation to your income, employment status, existing loans and spending habits. This helps them to determine whether or not you can be relied on to pay back the loan.
The required documents may vary from lender to lender but usually, you’ll be asked for the following:
- Bank statements: You’ll be required to provide the lender with your personal bank account statements for the previous six months.
- Proof of ID and proof of address: Usually these can be in the form of a current valid passport or current driving licence and a recent utility bill.
- Proof of your Personal Public Service Number (PPSN): This is usually found on a payslip, a tax assessment document or correspondence from the Department of Employment Affairs and Social Protection or the Revenue Commissioners.
- Credit card statements: Usually two or three months of credit card statements are required.
- Proof of income: If you’re a PAYE employee, you will usually need to provide payslips for the previous three months. If you’re self-employed you’ll need to provide certified accounts, likely for the previous two or three years, and a copy of tax returns from the previous two years.
- Stamped employment status report: You’ll need to provide an up-to-date employee status report completed and stamped by your employer.
4. How will my mortgage application be assessed?
Lenders will consider a number of factors when assessing your mortgage. The main things they’ll look at are:
- Income: Lenders will look at your annual income to ensure you can afford the mortgage repayment. They may also take bonuses and overtime into consideration.
- Savings: You need to demonstrate the ability to save regularly as this reflects responsible money management, an ability to meet your mortgage repayments and shows you have enough for a deposit.
- Age: Generally most lenders will only offer mortgages up to the age of 67, but many go to 70 now.
- Debt: If you have outstanding loans the amount of money you can borrow may be reduced.
- Monthly expenses: Lenders will look at your monthly living expenses and other outgoings, such as childcare, to ensure you can afford a mortgage.
- Credit record: Your credit record shows your ability to handle repayments. Lenders will also try to identify any red flags, such as gambling habits.
5. What fees are associated with taking out a mortgage?
There are various other costs associated with taking out a mortgage and you’ll likely need to have saved for these before a bank will consider your application.
- Stamp duty: This is a Government tax charged on the written documents that transfer ownership of property from one person to another. The rate of stamp duty is based on property value. Currently, there is a rate of 1% on the first €1 million paid for residential property and 2% on anything above €1 million.
- Legal fees: You’ll need to pay a solicitor to look after the legal aspects of transferring ownership of the property to you. Keep in mind that solicitors’ fees can vary considerably and can either be a percentage of the property price or a flat fee.
- Lenders valuation fee: Your lender will insist on getting a professional valuer to estimate the property’s market value to ensure you’re getting a fair price. This usually costs around €150.
- Surveyors fees: While this may not be required by your lender, getting the house you’re interested in surveyed is always a good idea. This can help to determine whether there are any hidden defects or structural issues with the property.
- Local property tax: This tax is charged on all residential properties in Ireland. It’s a self-assessed tax paid annually to Revenue.
- Insurance: To draw down your mortgage, most lenders will require you to have mortgage protection insurance and home insurance in place. Mortgage protection is a form of life insurance that will pay off the outstanding balance on your mortgage should you pass away, while home insurance will financially cover you should your property and contents be damaged.
6. What is approval in principle?
Before being able to make an offer on a property, you’ll need approval in principle (AIP). This is a letter from a lender indicating the amount they could lend you, based on the information you provide. However, having AIP doesn’t mean that you have mortgage approval and it’s not legally binding.
It’s best to get AIP early on in your property journey, as estate agents will look for this as proof that you can afford to purchase a property. It usually lasts six months but it can be extended if you haven’t found the property you wish to purchase within that time frame.
To turn your AIP into a full mortgage offer, you need to find a property, get a valuation carried out and meet the AIP conditions noted in your AIP letter. Provided there are no issues and all of the information is correct, it’s unlikely your mortgage offer should differ from the AIP amount.
7. Are there any schemes available to support first-time buyers?
Yes, there are.
The Help-to-Buy (HTB) scheme and the First Home scheme are available to first-time buyers.
The Help-to-Buy (HTB) incentive: This is a Government tax refund scheme aimed at helping first-time buyers obtain the deposit required for a newly-built house or apartment. The scheme allows first-time buyers to get a refund on income tax and Deposit Interest Retention Tax (DIRT) that they have paid over the previous 4 years up to a maximum of €30,000 or 10% of the purchase price of the property, whichever is lower.
The First Home scheme: This is a shared equity scheme in which the Government takes a stake or ‘share’ in your home in return for providing you with up to 30% of the property price. This scheme is open to first-time buyers, divorcees, and people who have been declared bankrupt (and who may have previously owned a home).
The HTB and the First Home scheme can be used in conjunction with one another.
8. Are cashback mortgages good value?
Cashback mortgages provide new homeowners with a lump sum, which can go towards furniture, decorating or paying legal fees.
Cashback mortgages have become increasingly popular in recent years, but it’s important to do your research before opting to go for one. The popular incentive may provide short-term financial relief but can prove costly in the long run.
You should always consider the interest rate and overall cost of credit over the lifetime of the loan. Often the banks that offer the best cashback mortgages end up charging some of the highest interest rates, meaning you’ll pay a lot more over the term of the mortgage.
It should be noted that even if you receive a cashback offer from your lender, you can still switch mortgage providers at any stage.
9. Do I have to be a customer of a bank to apply for a mortgage there?
No, you can apply to any lender or bank for a mortgage even if you’re not a current customer there. For example, if you have a current account with the Bank of Ireland, you can still take out a mortgage with AIB instead.
Many banks do however reserve their best mortgage offers for their current account customers. This can result in mortgage holders unknowingly paying far more for their monthly repayments and missing out on the best rates.
By switching your current account, you could avail of a better mortgage rate so it’s worthwhile comparing the market and seeing what deals are available. There are a variety of offers available, from cashback incentives to reduced everyday banking costs.
10. Should I use a mortgage broker?
When applying for a mortgage, you can either go through a broker or apply directly to a lender.
If you’re feeling overwhelmed, it can be a good idea to use a broker, who can provide you with advice on the whole market. A broker can determine what lenders have the best rates and offers for your specific circumstances. Using a mortgage broker can also save you time and money as the process will be more efficient than applying directly to multiple lenders. As well, a broker can help identify which lenders are likely to give you a mortgage exemption.