As the cautious reopening continues and more activities become available, many people are looking forward to getting out and about and enjoying themselves after many months of restrictions.
This group likely includes potential first-time buyers (FTBs). Many individuals and couples who were able to work throughout the pandemic have been able to use this time to build up their savings.
While the urge to live a little is understandable, Martina Hennessy of doddl.ie is cautioning first-time mortgage borrowers to manage their spending and continue to save
regularly even if they have already saved the amount they want for a full deposit.
“Many of our mortgage applicants have saved more than they would have expected in the last 18 months due to limited opportunity to spend due to restrictions,” Ms Hennessy says.
“However, as we start to socialise and travel more, it is still really important to manage your spend if you intend applying for a mortgage, even if you’ve your deposit saved.”
This is because the deposit, while important, is just one aspect of a mortgage application.
“In assessing a mortgage application, lenders look at two key elements of an application — income and evidence of repayment capacity, taking in a narrow window of six months immediately preceding application,” Ms Hennessy says.
“Even if your income is strong and you’ve saved your deposit, your application will not be successful if you are not clearly demonstrating repayment capacity prior to application.”
As a general rule of thumb, she suggests borrowers should show evidence of €500 per month for every €100,000 they wish to borrow to show repayment capacity.
Repayment capacity can be demonstrated via rent paid, savings, and loans discontinuing.
Under the consumer protection code, banks are required to ensure that a proposed mortgage is affordable.
Lenders differ in the level of repayment capacity that needs to be proven — for some this is the proposed monthly repayment, while others stress-test the proposed repayment at a rate of 2% above the actual rate.
Crucially, they need to see that this repayment capacity is there every month.
“Lenders need to see repayment capacity in a consistent manner — so with regular savings it’s important that you don’t skip a month or dip into them,” Ms Hennessy says.
“They are looking to see that you have shown discipline in terms of demonstrating that you have a clear ability to meet your proposed mortgage repayment.”
That is not to say that you can’t enjoy yourself; your accounts don’t have to suggest that you are devoting every spare penny to the quest for a mortgage.
“Once repayment capacity is proven, the banks are generally not looking at discretionary spend outside of this, provided accounts are maintained in a satisfactory manner.”
- If paying rent, ensure it is evident on your bank statement via standing order or electronic transfer
- Set up a savings account and have an affordable monthly standing order go into this
- Do not overextend yourself to the detriment of your current account by availing of an overdraft or missing payments
- Save consistently every month — and try not to skip a month of savings
- Where possible do not withdraw funds from your savings accounts. Any amounts withdrawn for one-off payments should be referenced and receipted to show it’s not a recurring expense
- Loans due to be cleared do not need to be cleared prior to application — you can note they are to be cleared prior to mortgage drawdown and the lender will condition sight of closing statement.