New Home buyers, all your mortgage questions answered
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looks at the bigger questions around mortgages facing new home buyers
The most common form of mortgage, and the one that almost everyone will choose, is the Annuity Mortgage. This is the common or garden variety whereby the lender (mortgage company or bank) advances a large sum of money to the borrower so that they can purchase their home. The borrower then commits to making a series of payments every month over the term (length of time) of the mortgage until the amount borrowed initially is fully paid with interest. The term is typically between 25 and 30 years.
Every month's payment is a mixture of the original sum advanced (the principal) and interest payments. The lender evens out the spread of payments so that those payments made at the start of the term are mostly made up of interest.
This is why, in the first few years of repaying a mortgage, you may notice in your annual statements (that the lender provides) that the principal amount is coming down very slowly. As time goes on, however, an increasing proportion of your monthly payments are going to the principal, so that in the final years of the mortgage term, the principal reduces rapidly.
There are other types of mortgage apart from the Annuity Mortgage. These are the Endowment Mortgage, the Current Account (or Offset) Mortgage and the Pension Mortgage.
The latter — the Pension Mortgage — involves the borrower making monthly repayments on the principal. Separately, they are also paying into a pension fund. By the end of the term, the principal is paid off and the accumulation of payments into the pension fund should be enough to pay off the interest rate bill with some pension fund money to spare. The Endowment Mortgage works in a similar fashion, except that the ‘interest’ payments are made towards an endowment fund. The Current Account Mortgage operates in a similar fashion, with principal and interest payments being made separately and simultaneously. It might be worth consulting a financial advisor on the differences between these three less popular options before deciding which one suits you.
Conor Power Since the start of January 2023, Central Bank rules stipulate that a First Time Buyer may borrow up to four times the amount of their gross salary. Before that, the limit was 3½ times ones annual salary but with house prices rising, it left lots of people without the possibility of trying to buy their own home. Simply put, if your salary is €60,000 per year before taxation, then you can borrow up to €240,000 (four times €60,000).
There is some wriggle room with this, however, and more recent schemes have resulted in the gap closing between what one could afford using the Central Bank rules and what was available on the market.
If you are considered to be in the “high-earning” category (which is €50,000 per annum or more), then the lender can offer you more and exceed the “four times salary” rule. Similarly, a couple earning more than a combined salary of €70,000 is considered to be in the “high earning” category.
Furthermore, every bank is allowed to exceed the income rules in a limited number of loans in a calendar year, giving lenders a little more wriggle room in granting home loans.
When applying for a home loan, being able to show a good record of money management counts for a lot, with banks looking more favourably on those who have a strong saving record, for example.
The big game changer that an increasing amount of people are taking advantage of, however, is the Government’s shared equity scheme that has been in play since July 2022. With this, borrowers can receive additional equity of up to 30% of the price of the home, bringing property that would otherwise be unreachable using the normal Central Bank rules within their budgets. For all the rules on eligibility, see firsthomescheme.ie.
The maximum that any bank or lending institution can advance is 90% of the value of the property. This is knowns as the LTV or Loan-to-Value ratio, which is set by the Central Bank.
In buying a new home, therefore, you need a minimum deposit amount of 10% of the price of the property. The higher the deposit you managed to have accumulated, however, the better. Those with a higher deposit need to borrow less and banks offer better rates to those with larger deposit amounts.
The Government’s Help To Buy (HTB) scheme is one of the most innovative measures that has been brought into legislation in recent years and it’s a big help for all those who struggle to gather a deposit while paying very high rental amounts. It allows borrowers to effectively reduce the minimum deposit amount required. A First Time Buyer looking to purchase a new home is entitled to a tax rebate of up to 10% of the price of the property up to a maximum of €30,000, under the HTB scheme. Most banks will take this amount as part of the deposit, but you need to enquire about it beforehand.
“The best rate is the lowest rate.” Over 25 years ago, this is what senior adviser in one of Ireland’s top lending institutions said to me. It might sound very obvious, but it’s amazing how easily one can get side-tracked, confused and flustered by the many options out there with regard to interest rates.
One can divide interest rates by definition into “fixed” and “variable”. The variable rate is the rate you get today. As the name suggests, it is inclined to vary from one year to the next. If your repayments on your homeloan are €945 this month, there’s no guarantee that they won’t be €1,045 per month this time next year. Equally, they might well be down to €845 per month.
This lack of security is just fine with some people. The one advantage of a variable rate is that you can pay it off whenever you want without incurring a penalty. The disadvantage is that you don’t have any extensive period of certainty as to what your repayments will be every month.
With a fixed rate, you can take advantage of a fixed period over which you are guaranteed that the rate will stay the same and your monthly repayments will be the same.
Traditionally, the fixed rates were always higher than the variable rates. This makes sense, because if a lender is offering you a fixed rate, then they are the ones taking a risk. If the base rate increases, they could be at a loss, for example. On a variable rate basis, the lender always has the option to raise the rate and react to any base rate increases from the ECB.
For the last 15 years however, tradition has been turned on its head. We have been living in an era of historically low interest rates — touching zero on more than a number of occasions. During this time, lending institutions have gone from offering lower variable interest rates to offering lower fixed interest rates.
Very often, one could find interest rates that were fixed over ten years lower than variable interest rates. With interest rates, it’s always an expression of risk on the part of the bank. While traditionally, a variable interest rate offered banks the lowest form of risk, then the rate was usually the lowest. During the last 15 years, however, banks haven’t seen fixed rates as a risk at all. They were perfectly happy to offer low rates fixed for the next 4 or 5 years because they couldn’t see much of a chance of interest rates going up in that period of time.
Over the last two years, things have been upended by the combination of the effects of the global pandemic lockdown and the wars in Europe and the Middle East. Inflation and interest rates have risen again.
That should have signalled a return to the situation of old but it didn’t. In other words, even though interest rates went through a series of increases from September 2022 to September 2023, the banks were still offering fixed interest rates that were lower than fixed ones. In other words, even though many people wondered just how long this period of rising interest rates would go and how high interest rates would climb, there was clearly less concern on this matter from the lenders.
Although they increased their lending rates accordingly with each base rate increase from the Central Bank, they maintained their policy of offering lower fixed rates than variable rates. They were betting on rates coming back down again at some point quite soon.
And they were right. We’ve had two reductions in base interest rates from the ECB this year and it would be a foolhardy person who would not bet on more reductions to come over the coming year.
It all comes back to taking the lowest offer. In 99 cases out of 100, this is the best move. Paying the lending institution less of your hard-earned money and retaining more of it for other, more enjoyable uses, is usually the best option.
When buying a home, there are always additional costs to consider despite the main ones. When you’re dealing with the movement of a large amount of money, the smaller costs that need to be looked after can often slip under the radar. Lurking underneath, they will pop up nonetheless and it’s the accumulation of this series of smaller charges that, as a whole, constitute a major cost that the First Time Buyer can easily overlook.
As with everything else to do with the massive juggernaut of an experience that is buying one’s home, making a list and getting on top of it are all-important.
The list below is not an exhaustive one, by any means. It does, however, represent a typical list of items that come with buying a home and for which one needs to make provision:
There’s no avoiding the inevitable and there’s no avoiding the inevitable cost of ensuring that your mortgage will be paid off in the event of the loss of you (or your spouse). The basic requirement from a legal standpoint is a policy that pays out the sum still remaining on the mortgage in the event of the demise of either you or your partner or spouse. After that, you can enhance the policy by having it pay out more than just the remaining balance. For those who are self-employed, they often add extra policy bits and pieces that protect against a serious illness or a sudden loss in earnings. Shopping around is always wise in the strange world of insurance but it shouldn’t be much more than €250 per year for the basic level of protection.
Another vital one, with rates tending to vary wildly. €400 per year should cover it but various factors – such as location – come into play.
For many, the process of buying a home is the first time they will need to hire a lawyer. What’s certain is that it won’t be the last, so ensuring that you get along with your solicitor and trust him/her is the most important point to consider. After that, there is the cost and a figure of €2,000 for conveyancing is a good ballpark figure.
For every home sold the Government extracts 1% of the price of the property. Like all taxes, it’s compulsory and if you were buying a home 30 years ago, it would have been considerably higher. This rate applies to all homes under €1 million. Thereafter, any amount above that mark is taxed at a rate of 2%.
Having someone look after a snag list of things for when you’re moving into your home might seem like a bit of an unnecessary expense. While it’s true to say that one does not necessarily have to pay a third party to check the snag list, it is certainly money well spent. Expect to pay around €200 and to book them well in advance.
Until an independent valuation is carried out on your home, the lending institution will not release the all-important loan cheque. This cost should set you back something in the region of €200.
Unlike the valuation fee or the stamp duty, this is neither a legal nor a contractual obligation your solicitor will always advise you to carry out a structural survey of your home. And when your solicitor thinks it’s a good idea, it almost certainly is! This part of the puzzle should incur a cost in the region of €300.