So as I’m preparing to start my own house buying journey, I wanted to share with you all some of my thoughts, tips and tricks to knowing how much you can borrow, how much you should borrow and other things that are really important to know before buying your first home. All of this is on the basis that I will need a mortgage and am not buying with cash (unfortunately! :)).
Another caveat I want to make here is that I am talking about getting a mortgage and buying a property to use as my family home and not an investment property. I’m also not trying to beat the market, just trying to make a sensible and well-rounded decision that’s best for me and my family based our current circumstances. I hope this info will help you too!
There is A LOT of ground to cover here so this is part 1 and part 2 will follow in the comings days. 🙂 Now that all of that is out of the way, let’s jump straight into it…
How much can I borrow?
Loan to Value Ratio
The first rule to be aware of is the Loan to Value rule. In a nutshell the current rules in Ireland state that first time buyers must have a minimum deposit of 10% of the property price i.e. you can borrow a maximum of 90% and anyone else must have a minimum deposit of 20% of the property price i.e. you can borrow a maximum of 80%. So if for example, I was a first time buyer and looking to buy a house for €500,000 (for easy maths), I would need a minimum deposit of €50,000 or if I was a second time buyer I would need a minimum deposit of €100,000. Note, these are the minimums/maximums and you can obviously put down a greater deposit than the minimum required. Banks do make certain exceptions up to certain limits, but these are on a case by case basis.
Loan to Income Ratio
The second rule to be aware of is the Loan to Income Ratio rule. This rule states that you can borrow up to a maximum of 3.5 times your gross annual income. So if for example, my joint annual gross household income was €100,000 (again for easy maths), the maximum loan I would be able to get would be for €350,000. Again, there are some exceptions that can be made but these are also very much on a case by case basis.
Net Disposable Income
Then depending on the lending institution, different banks will have their own other criteria that they will use to determine if you are eligible for a mortgage and the amount. For example, the Net Disposable Income (NDI) calculation is often used, where the bank decides that the sum of all your loan repayments (e.g. mortgage and car loan and Credit Union loan), can be a maximum of X% (e.g. 35%) of your total net monthly income. For example, if my net monthly income is €5,000 and I have a car loan of €300 per month I am paying, and the bank allows a maximum NDI of 35%, then €1,750 is the maximum the bank would allow me to pay on all my loan repayments. So taking into account the €300 per month car payment, €1,450 is the maximum my monthly mortgage repayment could be. The %s can vary, this is just an example.
Stressed Interest Rates
Another thing banks will test, is stressed interest rates. So if interest rates where to increase by 2%, would you still be able to afford your mortgage repayment.
The Citizen’s Information website has a lot of useful information on all this stuff and links to other resources, you can access their website here.
How much will it cost me?
Interest Rate and Term
It is important to consider the interest rate type (i.e. fixed rate or variable rate) and term of the loan. Both of these impact the cost of credit of the loan, i.e. the cost to you of the bank lending you the money. The higher the interest rate and the longer the term of the loan, the higher the cost of credit is i.e. the more you will pay back to the bank overall in interest. These factors will also impact your monthly repayment amount. The higher the interest rate the higher your monthly repayment will be. The longer the loan term the lower the monthly repayment will be but you will pay a higher cost of credit overall (because you are borrowing the money for a longer length of time).
Online you will find the different interest rates on offer by the various lenders, you can use an online calculator to play around with different interest rates and terms to see what the impact is on your monthly repayment and your overall cost of credit. I have a post on some of my favourite price comparison websites here that might be helpful. It would also be extremely helpful to under how a mortgage works in particular the cost of credit and how the amount, rate and term of the loan can impact the overall amount you pay. Take some time to read about these topics so you’re fully armed with all the information you need!
There are a number of other costs associated with home buying apart from your deposit and mortgage. Ideally you should have saved in advance for these costs in addition to your deposit. Some costs include:
- Stamp duty – this is currently around 1% of the purchase price of the property (up to €1 million)
- Legal fees from your solicitor
- Moving costs e.g. furniture removal
- Sales costs (if you are selling another property)
- Appliances, furniture and décor
- Any maintenance or repair work that may be required
- Valuation fee
- Surveyor/engineer fees … to name but a few.
This feels a little bit like information over-load so I’m going to leave it there for today. Keep an eye out for part two of “Things you NEED to know and do before buying your first home” coming very soon! 🙂