Financial advice for new home buyers

Conor Power offers financial advice on the current mortgage market for those planning to buy a new home
Financial advice for new home buyers

Good time to buy: Compared to six or seven years ago, lending policies from banks and mortgage companies have become relaxed. Picture: iStock

During the earlier years of of a mortgage, the majority of what you pay every month is composed of interest but as time goes on, an increasing proportion of the repayments goes towards paying off the principal.
During the earlier years of of a mortgage, the majority of what you pay every month is composed of interest but as time goes on, an increasing proportion of the repayments goes towards paying off the principal.

How much can I borrow?

Although the planned introduction of a Shared Equity Scheme later on in the year will alter the picture in the first-time-buyer’s favour, the current situation remains the same as it has for a number of years now: You can borrow up to 3.5 times your gross salary.

This Loan-to-Value (LTV) ratio is set by the Central Bank. It means that, under normal circumstances, a mortgage lending institution in Ireland can offer its client an amount of no more than three and a half times their salary before tax.

Therefore, if someone is earning €50,000 per year before tax, then they can get a home loan of up to €175,000.

There are exceptions to the LTV rules in Ireland. For those in a “higher earning bracket” (more than €50k/annum for an individual or more than €70k/annum for a couple), the 3.5 ratio may be exceeded, for example.

Also, every lender has the power to exceed the 3.5 ratio in no more than 20% of applications in a calendar year, allowing some wriggle room for home loan applicants. People with a strong savings record and/or who have jobs in stable sectors might find themselves in such a fortunate position, for example.

How much deposit is required?

A deposit of at least 10% of the purchase price will be required, whether you’re a first-time buyer or not. The higher the deposit amount you have, the better the rate you can get. If, you’re buying a house for €300,000, for example, you’ll need a deposit of at least €30,000.

Bear in mind that a first-time buyer of a new home is entitled to a tax rebate of up to 10% of the purchase price of the house (up to a maximum of €30,000) — a good chunk of cash back into one’s pocket.

Compared to six or seven years ago, lending policies from banks and mortgage companies have become relaxed. There was a time, for example, when someone applying for a mortgage had to demonstrate a strong savings record and couldn’t include any gifted or lent monies from their parents, but that kind of constraint on first-time buyers has largely disappeared in recent years.

The table below gives the example of what monthly repayments would be from different lenders on a borrowed sum of €270,000 over a 30-year period – based on current market rates. In these instances, rates are for customers with the normal criteria (10% deposit and new customers) but some banks will offer better rates again if your deposit is larger or if you open a current account with them.

Which rate should I choose?

There are two main categories of rates: (a) fixed; (b) variable.

In a more traditional or ‘normal’ market, the variable would usually be the lower one but we are living in times of historically low interest rates and this era shows no signs of ending. For the foreseeable future, therefore, fixed rates offer better value.

Having a fixed rate means that you know precisely what amount you’re paying back every month for the duration of the fixed-rate period. Choosing the one to go for is down to one’s personality, in many ways. For example, if you choose a five-year fixed rate, then you might pay a little more than had you chosen a three-year rate but you get the security of knowing that you’re repayments won’t change for five years. It’s a matter of assessing your socio-economic life – finding the balance that suits you. My advice? Go for the lowest!

What are the different types of mortgages?

For the vast majority of cases, there is just one type – the Annuity Mortgage. This is the normal, common-or-garden variety of home loan whereby the bank or other lending institution advances you a sum of money, allowing you to buy your home. You agree to make a series of monthly repayments over a set mortgage “term”. 

This is usually over 20 or 30 years. Within each monthly payment, some of it is going to pay off the Principal (the original amount advanced to you) and the rest of it is going towards the Interest. During the earlier years of the repayment term, the majority of what you pay every month is composed of interest but as time goes on, an increasing proportion of the repayments goes towards paying off the principal.

Other mortgage types include:

  • A Pension Mortgage: this is an annuity plan where a pension plan is set up to run alongside the principal repayments. The final pension amount should pay off the interest and, hopefully, have some extra pension cash left over.
  • An Endowment Mortgage: it’s similar to the Pension Mortgage, with an endowment fund running alongside the repayments on the principal, at the end of which the endowment fund should pay the interest with some money left over.
  • A Current Account Mortgage: it’s also known as an Offset Mortgage and works similarly to the Endowment Mortgage.

When budgeting to buy a new home, allow for a range of costs including insurance and professional fees.
When budgeting to buy a new home, allow for a range of costs including insurance and professional fees.

Any other costs?

When buying a home, you also need to budget for a number of other significant costs, including the following:

  •  Life Assurance: Insurance rates are prone to massive fluctuations so this necessary cost is worth shopping around for. You should budget for something like €250/annum. When deciding the level of cover, the main thing is to cover the remaining mortgage amount. After that, it’s a matter of choice. You can choose full life cover, for example, meaning that the policy would pay out the full purchase price at any stage of the term. There are further options after that, which you may or may not decide are worth paying for. These would include Mortgage Protection, Serious Illness Cover and Income Protection.
  • Home Insurance: This is another legal requirement and a cost that can vary wildly. Shopping around is important in order to get the best rate. The location of your home and the market value of it will be the main indicators of cost but you should be paying something in the region of €40 to €60 per month.
  • Solicitor’s Fees: A lot of people engage a solicitor for the first time when they buy their first home. Trust is the most important factor – hiring someone that you can place your trust in and with whom you can communicate should be is the first priorities before talking money. But expect to pay something in the region of €2,000.
  • Stamp Duty: This used to be a massive tax bill but it has now come down to the far more manageable rate of 1% of the property price, plus 2% of any part of the price that exceeds €1million.
  • Surveyor’s Fees: €300 should be around the level you’ll need to fork out for this. It’s not a full legal requirement but it is common practice in Ireland and your solicitor will advise it. It gives you an important structural assessment of the property you’re buying before completing your purchase.
  • Valuation Fee: Another bill that many first-time buyers overlook in assessing their purchase costs. It should be around €180 so it’s not one of the bigger costs but it’s important not to overlook it. All lenders require an independent valuation of the property before releasing the loan cheque.

More in this section

Lunchtime
News Wrap

A lunchtime summary of content highlights on the Irish Examiner website. Delivered at 1pm each day.

Sign up
Revoiced
Newsletter

Our Covid-free newsletter brings together some of the best bits from irishexaminer.com, as chosen by our editor, direct to your inbox every Monday.

Sign up