Not all mortgages are the same
Not everyone will apply for the same mortgage. If you’re looking to buy your first home, you’ll be searching for a different type of mortgage to someone who is looking to do renovations on an existing home.
For the purposes of our post, we’re going to discuss the general terms, rules and processes around all mortgages. You’ll find more specific details on different types of mortgages in our blog
Let’s talk mortgage loans
You might have heard the following terms:
● Loan to Income (LTI)
● Loan to Value (LTV)
The LTI ratio refers to the amount banks can lend to you. As a rule of thumb, banks can lend a sum that is up to 3.5 times your annual gross salary. This is your income for the year before PAYE and other taxes are deducted. If you’re applying for a mortgage with another person, then your combined annual gross income will be used to calculate how much you can borrow.
The LTV ratio decides how much money you can borrow in comparison to the size of your mortgage. While there are some exceptions to the rule, generally the mortgages that are awarded to first-time buyers are up to 90% of the full price of the house. The LTV ratio for second-time buyers is usually 80%.
Although LTI and LTV are rules set by the Central Bank
, different banks have different credit policies. Each bank will have their own set of guidelines that monitors their credit policy. This is why we work with all the banks to find the best mortgage for you when you work with us. You may get better terms with one bank than you would with another one.
Demonstrate that you can pay back your mortgage
One of the biggest factors that the banks use to decide if you get a mortgage, and for how much, is your “demonstrated repayment ability”. You have to show that you can afford to pay your monthly mortgage payments.
How do you do that?
The banks will look at any rent payments you make and consider that as evidence of repayment ability. They’ll also factor in monthly savings you make. If you’ve got any loans that you’re close to paying off in full, the amount you pay back will also be considered as proof of repayment ability.
The banks usually look at six month periods to calculate how strong your repayment ability is. So be consistent about your finances. One month of savings won’t help your application.
Calculate your net disposable income
All of your expenses need to be deducted from your salary to calculate your net disposable income.
Banks will go through your statements with a fine-tooth comb to build an accurate picture of what your true disposable income is. Repayments on loans, credit cards, overdrafts etc. will all be taken into account.
You’ll also be asked to share how much money per month you spend on items such as childcare (if you have children), groceries, entertainment etc.
Don’t worry if you have loans or credit card debt. It’s not necessarily a negative to have these kinds of financial commitments on your mortgage application. However, any funds you’re paying will be deducted from what your final net income figure will be. Therefore, if you are able to settle these bills before you apply for a mortgage, it’s in your own best interests to do so.
Another myth to dispel relates to online betting transactions that may be on your statement.
It’s not true that if the bank sees an online betting transaction, they’ll automatically disqualify your mortgage application. However, if regular online betting transactions are evident, for large amounts that cause you to go into your overdraft, then your application is in jeopardy.
No guarantee that bonuses or commissions count
You might earn extra income in your job through bonuses, commission payments or overtime.
A bank will take these into account as part of your mortgage application if the full amounts are guaranteed by your employer. A bank may also take these into account if they are not guaranteed but earned regularly.
Banks will want to see between two and three years’ of your payslips and P60 documents to prove that these additional funds are paid to you.
Don’t be disheartened though. Save any extra funds you receive as part of your deposit. The bigger your deposit, the more attractive your mortgage application.
Mortgages for self-employed people
A lot of self-employed professionals can feel that the mortgage rules are stacked against them. There are some extra requirements that freelancers and independent contractors will need to go through for their mortgage application, but rest assured that self-employed people still do get mortgages.
If this is the boat you’re in, banks will take into account the last two years’ accounts for your freelancer business (be that sole trader or a limited company) and two years’ personal tax returns to calculate your income. Banks will also want confirmation from your accountant that your business tax is up-to-date.
However the Banks will also provide an enhanced level of credit assessment in supporting Self employed people by looking at their ‘trading accounts’ in reaching the loan required based on their businesses profit levels.