Your comprehensive guide to mortgages and finance
Dream of owning your own place? State schemes are helping people buy a home. Photo shows new housing at Cedar Court, Rathgoggin, Charleville, Co Cork. Picture: Dan Linehan
When you go to make a purchase of any item – from a loaf of bread to thoroughbred horse, you need to have the price of the item in your pocket or on your bank card. In other words, you’re not going to purchase the item unless you’re prepared with your funds ready to be utilised.
For a house purchase, that’s essentially what you need to do – you need to ready your finances so that you’ll be able to act when you find the right home for you; to pounce on the opportunity in the highly competitive market that we live in today.
You’ll need to have a deposit to put down, as well as the finance arranged with your lender to complete the purchase – at least agreed by the lender in principle.
On top of that, however, you’ll need to know about the different charges and fees and myriad incidental costs that all add up into a sizeable sum. These are part and parcel of the home-buying process and you’ll need to have the money ready to be deployed for all of them.
It’s all about preparation. If you’re prepared, then you’ll see it through with the minimum amount of stress. There’s no pain in any payment once you’ve made adequate provision for all of it and are fully prepared for each outlay.
Unless you’re in the rare minority that makes you a cash purchaser, then you’ll need to gather a deposit and look for a mortgage.
What you can afford is dictated by your income and the loan-to-income (LTI) and loan-to-value (LTV) rules, as laid down by the Central Bank of Ireland.
In theory, there’s nothing wrong with the idea of making an offer on a property subject to mortgage approval. In practice, however, it’s much better to have the mortgage approval in principle in the bag before you bid on a house. It puts you in a much stronger negotiating position and, crucially, it clarifies the issue of what you can afford.
In working out just what your budget is, you should familiarize yourself with all the assistance – in its variant formats – that is available to you through Government incentives for first-time buyers in particular.
The Help-to-Buy Scheme was introduced in July 2016 to give additional assistance to first-time buyers purchasing a new home. It was a new idea designed to give a boost to both housing production and house-buyers.
The idea is to help those buying a new home (including those self-building a new home) with the deposit money required to get started. An increasing number of people were having severe difficulties saving money for the deposit, finding themselves effectively locked out of the market because of rising rental rates.
The solution was to give first-time buyers a tax break in the form of rebates from income tax and DIRT (but not any other taxes such as the Universal Social Charge) over the previous four years before the application date.
Under the scheme, applicants who qualify can claim up to 10 per cent of the purchase price of the new home, up to a maximum value of €30,000 in tax back. Nowadays, new homes costing €300,000 or less are quite rare but it’s a big sum of money that is likely to at least go most of the way towards a deposit. It is paid directly to your building contractor or, in the case of self-building, to the bank account you have with your mortgage provider.
First introduced in July 2022 as part of the Government’s Housing for All strategy (not yet a self-fulfilling prophecy), the First Home Scheme is a shared equity scheme, along the lines of previous such schemes that were in operation back in the 1990s and before.
The idea is for a local authority to give a first-time buyer a loan that will effectively take the form of a deposit on the house. The loan is a low-interest one and can be repaid over as long as 40 years.
In fact, it’s that idea of another body taking a stake in your property, coupled with the fact that it is another loan you’re taking out, that resulted in a slow uptake when it was first launched. Over the ensuing months and years, however, people began to appreciate the extraordinary access it gave first-time buyers to owning their own home with a huge cash boost.
All first-time buyers qualify for the scheme, but there are limits on the prices of the houses that qualify and these vary according to location – from the highest ceiling in places like Dublin city and surrounds and Cork city (where it’s €500,000) to Sligo, Offaly or Tipperary counties (where it’s €375,000).
The amount of the loan is a generous size. If you’re already using the Help to Buy scheme, you can borrow up to 20 per cent of the purchase price of your home. If you’re not using the Help to Buy scheme for some reason, then that figure goes up to 30 per cent.
There are no interest/service charges on the amount for the first five years. After that, the charge is 1.75 per cent per annum in years six to 15, 2.15 per cent per annum in years 16-29 and 2.85 per cent per annum from year 30 onwards.
The Fresh Start principle applies for applications to State affordable housing and loan schemes. It enables people who previously owned a home but no longer have a financial interest due to divorce, separation, or insolvency to apply for State-backed housing supports. It treats these applicants similarly to first-time buyers, providing access to the Local Authority Home Loan, First Home Scheme, and affordable purchase schemes.
Another initiative for those on moderate incomes, whereby the local council will step in and take a stake in a property, effectively lowering the price. The Council contribution can be paid back whenever it suits or when the property is sold.
If you’re renovating or bringing back an old derelict house to life, the Government has two generous grants. The first is the Local Authority Purchase and Renovation Loan (LAPR) – a Government-backed mortgage/loan that helps you buy or renovated a derelict or uninhabitable home. The second is the Vacant Property Refurbishment Grant – a payment that helps turn a vacant or derelict property into your permanent home. The normal grant is €50,000 but it can be increased to €70,000, depending on the budget for the work involved.
Once you have all of the above in hand, you can have some idea of what you can afford. You’ll have a budget based of roughly what to look for, remembering that getting your foot on the property ladder is the most important thing. Then you have a foothold in the door, so to speak, and trading up in the future will be a much simpler process.
Before you talk to a lending institution, you need to have a deposit to put down on a property and this must be a minimum of 10 per cent of the purchase price. If you have anything less than that ready to pay out, then you’re very unlikely to get a home loan. If you have managed to save more than that (say, 15 per cent or 20 per cent of the purchase price), then that puts you in a stronger position as a buyer – in the process of negotiating a price and also because you’ll almost certainly get your loan at a lower rate as the LTV ratio diminishes.
In talking to lenders, there’s a certain amount of presentation involved and alongside the deposit, your case will be very much strengthened by having bank records that illustrate your ability to save and manage money in a careful and steady fashion.
For many first-time buyers, the high rent levels make it very challenging to save money and produce a deposit, but that is the challenge that needs to be overcome if at all possible. Rather than producing a deposit gifted by parents, for example, it’s far better if there’s evidence in your bank accounts of that money being accrued from earnings over a period of time.
This is important because the more attractive you look from the lenders’ point of view the sooner you will get mortgage approval and the more easily, you’ll be able to shop around for the right rate.
As well as the above-mentioned LTV limits of 90 per cent, the Central Bank sets the legal conditions on how much you are entitled to borrow according to your income. For a home loan, the limit is set at four times your gross annual income (a measure in effect since January 2023). This is reduced to 3.5 times your income for any subsequent house purchase.
There is no shortage of people wishing that this limit could be increased, but the Central Bank also has a duty of care to the wider economy, in ensuring that house price inflation doesn’t go out of control and limiting the amount that one can borrow is one way of not allowing galloping inflation and over-borrowing.
There is a certain amount of wriggle room on these limits, however. For each bank, they can stretch these boundaries for a limited number of customers in each calendar year. If your earnings are categorised as being in the higher-earning bracket (€60,000 per annum or more for a single applicant and €80,000 or more for joint applicants), then you may qualify for an extra amount in borrowings from the bank.
Any bank can offer these increased amounts to no more than 15 per cent of borrowers within a calendar year. Once again, those that have the better presentations stand a better chance of qualifying for an increased amount in the loan-to-income (LTI) limits.
The next step is to find out precisely what each home loan translates as in terms of monthly repayments.
Remember that you’re buying a home to live in it; not to exist in. While it’s good to be ambitious in terms of price, there’s simply no point in stretching yourself so thin that you won’t be able to put by savings or be able to afford the occasional treats – whether that’s taking a holiday or going out for a meal or drinks with friends. It’s all about finding the right balance for you and your partner.
You don’t want to spend the rest of your life paying off your mortgage but equally, there’s no point in living too restrained a lifestyle for years just to try to pay off your mortgage sooner. As the old saying goes, ‘When people make plans, God smiles.’ Before looking at different rates, it’s important to be aware of the different types of mortgages available on the market.
The first point to be aware of is that although there are different types of mortgages out there, the one that dominates is the annuity mortgage – the common or garden mortgage that works under the same time-honoured principle that has served home buyers for decades. The vast majority of all mortgages are annuity mortgages.
In this arrangement, the bank or lending institution advances them the money required to buy their home. The purchaser uses that money to complete the purchase of the house and will then make a series of repayments to the bank/lender over a specified length of time until the debt is cleared.
The repayments made are a mixture of interest payments and the principal (original amount borrowed) and the normal time period (term) is between 25 and 30 years. As another marker of how things have changed over the years in the new homes market, the standard mortgage term in the 1980s and early 1990s was generally 20 years. It’s a reflection of how house prices have risen in relation to real income.
With this arrangement, you make regular payments on the principal (the original sum borrowed). Alongside it, you also make regular payments into a fund known as an endowment fund. The idea is that this managed fund (a low-risk fund) will build up over time and by the time all the principal has been paid off, the endowment fund will have enough to pay off the interest that has accrued over those decades and ideally, with a little bit left over.
This is a variant of the endowment mortgage, with the dual payment system of principal and investment being made side by side. The only difference is that you’re paying the investment part of the regular payments into a pension fund, which has particular tax implications.
Also known as an offset mortgage, this is a simplified version of the endowment mortgage and the pension mortgage, involving payments into a current account that will gain interest and build up so that they will repay the mortgage interest at the end of the term.
The endowment, pension and current account mortgages are all viable options but they have lost favour in the eyes of the home-buying public. While they were popular in particular eras that were characterised by rising financial services tides and economic booms, the current attitude appears to be in favour of a more straightforward way of doing business and not having their repayments split, with one part of it a bit too dependent on general market performance.
The Competition and Consumer Protection Commission (CCPC) Mortgage Money Tool is a very handy aggregator site that will show you all the rates available at any given time from the various home loan lenders in the Irish market (ccpc.ie), as well as the various terms and mortgage types.
On the same website, you can also find out about the different types of financial adviser available to you. You may want to consult a financial adviser so that you’re assured of being up to date with the entire scene, but the CCPC website is quite comprehensive in the advice it offers, including the questions to ask and the steps to take when shopping around for financial advice.
As someone who was working in the business told me many years ago (when I was also working in mortgage brokering agency), “The best rate, in my opinion, is the lowest one.” I couldn’t have put it any better. Rates are charged by your lender and, unless there are other extenuating circumstances, then the less money you have to pay off, the better.
That said, you do need to be informed before you make any decision, so here are the different types of mortgages and a little more about the elements that go into thinking about and choosing the right rate for your needs.
You can essentially divide mortgage rates into two categories – fixed and variable.
A mortgage with a variable rate means that the rate you get today can vary. It can go up or down from the rate you started with and that will all depend on the myriad factors that influence economies and interest rates.
When you take out a mortgage with a variable rate, you know with a fair degree of certainty what your monthly repayments are going to be for the next number of months. After that, however, the rate may go up or it may go down. Consequently, your monthly repayments will increase or decrease.
Interest rate increases don’t happen overnight, however. If a rate rise is on its way, the first news of it will be announced by the European Central Bank (ECB). Then over a matter of a few weeks, a rise in rates will filter down to people with mortgages. The same thing happens when interest rates go down but that, of course, is welcome good news at any time.
The advantage of the variable rate mortgage is that it can be paid off at any time without incurring any penalties. Traditionally, the variable rate mortgage offers the lowest interest rate but we live in unusually stable times just now (from a financial management perspective) and it is actually the fixed rates that offer better value.
Fixed rates are rates that are fixed for a defined period of time. The shortest term of the rate is usually one year and they can be fixed for much longer, depending on your mortgage provider.
Typically, in today’s market, the one and two-year fixed rates are lower than the variable rates. This is a clear sign of stability in a financial market because it effectively means that the banks are betting on there being no significant change in interest rates over the next year or two.
The fixed rate is of great benefit to you as a homeowner because it means that you know precisely what your monthly repayments are going to be over the period agreed. If you’ve fixed the rate for two years, then whatever else happens in your life and in your monthly outgoings, one thing you know for certain is that your monthly mortgage bill won’t be changing for the next two years.
It works both ways too, to a certain extent. Banks and lenders live on steady regular income. As long as there’s no risk to them that they’re going to be caught out by a sudden surge in interest rates (remember the banks are also borrowers, borrowing from the international markets), a steady locked-in stream of income is good business as far as they’re concerned.
The only disadvantage with the fixed rate is that you are locked into an agreement over the chosen period of time. If you receive a windfall and find yourself suddenly able to pay off your mortgage, you’ll incur penalties that would normally equate to the income stream of interest lost to the lender. During the earlier years of a mortgage, most of your monthly repayments are made up of interest, with that percentage dropping gradually as the years go by. A penalty for repaying a fixed mortgage early in its term, therefore, can often be a large percentage of the entire repayments due for the remainder of that fixed period.
With little to distinguish between different lenders in terms of rates being offered, there are an increasing amount of add-ons and benefits on offer, attached to certain loans that give something back or shave off a little in the rate itself.
As previously mentioned, one way of getting a lower rate is to increase the amount of your deposit. All lenders give you a better rate for borrowing a lower proportion of the property’s value. Positive action for the environment has become firm policy in companies everywhere and in the banking world, most lenders encourage people to get greener by offering green rates to those whose property fit their criteria.
A number of lenders also give cash back to those taking out certain mortgages. The process of buying a home is a particularly expensive one, with lots of extra bills to be settled before moving into your home, after which there might be even more bills to be settled before truly settling in. Conscious of this, lenders know how important a little cash in a first-time buyer’s life can be.
It is, of course, all a game of percentages and predictions and each person or couple needs to think about what suits their particular needs. All things being equal, however, there’s a lot to be said for going back to that original piece of advice mentioned earlier: the best rate is the cheapest rate.
Before going into battle in search of a home you can afford, you also need to take into account a series of additional costs that will have to be met during the process of the house purchase.
These are the niggling little bits and pieces that have to be sorted out and which are, for the most part, unavoidable, with the remainder of them being advisable.
Taken all together, however, they add up to a sizeable amount of money.
An unavoidable cost and it should be the first one on your mind anyway because it simply doesn’t make sense not to insure your home. Strictly speaking, it’s not a legal requirement but if you’re getting a mortgage, then the lender will insist on it. It’s also a cost that can vary wildly from one provider to another, so it’s worth shopping around in advance, insofar as that is possible. You normally won’t get an accurate quotation from an insurance company until you know the address of your new home. It’s a bill that will cost you in the region of €500 per annum.
This is another essential legal requirement. The basic version and minimum legal requirement is that the policy covers just the remaining balance on the mortgage, in the event of the demise of one or both of the borrowers. As with all such policies, you can have any number of add-ons. The pay-out can be increased to an amount over and above the mortgage balance, for example. Many people go for a policy that pays out the entire amount borrowed. There’s also Serious Illness Cover – a policy that pays out in the event of a borrower contracting a serious illness from a specified list, that will leave them unable to earn their previous income level. Income Protection is another policy that protects ones income against other unforeseen circumstances. The basic package will start around €300 per year.
For a lot of people out there, the first time they engage the services of a solicitor is when they are buying a house. The only rule of thumb for choosing a solicitor is to go with someone you trust. Cost should be a secondary element in this case, to be discussed with your chosen legal counsel. The bill should be around €2,500 plus VAT but can easily be more. Once again, trust is the main thing for what will possibly be the largest and most important transaction of your life to date. In the meantime, it’s worth having a look at the website of the Legal Services Regulatory Authority (https://www.lsra.ie/for-consumers/your-legal-bill-explained/).
It isn’t a legal requirement to have a structural assessment carried out on your new home but a solicitor will generally advise you to have it done. If it’s a new home and under guarantee, many buyers won’t bother with it. If you do continue with this usual step in buying a home, then you should put aside a figure of about €350 plus VAT.
Another legal requirement – the lending institution won’t release the all-important loan cheque until an independent valuation of your home-to-be is carried out. The cost should be around €200 plus VAT.
You might need to pay some of this when you’re buying the home. Secondly, if you’re buying a second-hand home, you need to check that the previous owner’s LPT payments are up to date.
For registering your title deeds with the Land Registry/Registry of Deeds (the former is gradually replacing the latter as the principal title registration system), you have to pay a fee that is based on the value of your property. Typically, it’s about €700 or €800, with a separate fee payable for the pleasure of registering a mortgage on the title.
You have to pay a tax called Stamp Duty when you purchase a house. It’s 1 per cent of the purchase price of your property, unless your home costs over €1 million. In that case, you must pay 2 per cent on the amount exceeding the million. But don’t grumble – 20 years ago, it was a multiple of that amount.
If you’re buying an apartment or another unit within an overall property (collectively known in the industry as a multi-unit development (MUD), you’re purchasing an apartment but you are also buying into a situation where you will have shared responsibility for a common area, which involves an annual fee or charge to a management committee. In the case of a block of flats, the common areas will include the maintenance of the building itself, as well as exterior areas that might be part of the property.
CONNECT WITH US TODAY
Be the first to know the latest news and updates
