There are several different factors to consider when looking for a mortgage including the amount you are able to receive from a loan, the LTV, the interest rate, the type of interest, the duration of the loan, and payment amounts. Most of this information should be provided on the ESIS (European Standardized Information Sheet). When looking at this advice keep in mind that exceptions do apply to certain financial situations, but this is generally good practice.
Mortgage Lending Limits
The first thing to consider when applying for a mortgage is how expensive of a house you can afford in the first place. There are a few limits placed on how much a lender can offer you based on your financial standing. The loan to income limit (LTI) restricts an applicant from borrowing more than 3.5 times their income. So if a person makes €50,000, the maximum loan they could receive is €175,000. The other restriction is the loan to value restriction. Basically, this means that a loan can only fund a certain percentage of the house cost.
Loan to Value
Loan to Value (LTV) is the percentage of your home value that is paid by the loan. In other words, the LTV is the outstanding loan value divided by the home's total value and then multiplied by a hundred to get the percentage. 90% loan to value is required for first-time home buyers, 80% for non-first-time home buyers, and 70% for an investment property. So if you wish to buy a house worth €200,000 and you’re a first-time home buyer, then you would have to pay €20,000 upon purchasing the house. A lower LTV usually means lower interest rates, which means a lower total amount paid. This also means lower monthly payments because the total amount borrowed is less.
Making a large upfront payment is a good idea, but only if you take future payments into consideration. Make sure that whatever your down payment is, you still have enough money left over to cover monthly payments and any possible home repairs. In addition, a larger upfront payment means you will have to save up for the house longer. In general, the larger the down payment the better, but keep the risks and the time you have until you need to buy a house in mind when doing this.
Interest Rates
You generally want to look for the lowest rate because this means you’ll have to pay less over the lifetime of your mortgage. However, it’s not that simple when it comes to interest rates. You also have to pay attention to whether you’re getting offered a fixed or an adjustable (variable) interest rate. Fixed-rate is usually better as long as it’s a competitive rate. In the current market, fixed rates are looking increasingly enticing because of the hiking interest rates. With adjustable interest rates, you can choose to pay off your mortgage early or increase your monthly payments. Falling interest rates help you, but you can also get hurt from rising interest rates like in the current market. Changing interest rates can leave you vulnerable at some points if you don’t prepare for it. When looking at different interest rates, be sure to mention that you’re shopping around because they might offer lower rates to win your business. Another thing to keep in mind is the duration of your loan. A longer loan means a lower monthly payment, but it also means you’ll be paying a higher total cost because of interest. Check payment amounts with your monthly income to be sure you aren’t paying more than you have.
Consider switching mortgages
Refinancing can help reduce your mortgage cost if you think your home value has gone up. In the current Irish housing market, home values are increasing dramatically, so it might be helpful to refinance your home or think about switching mortgages. The average interest rate in Ireland is around 2.7%, so if the interest rate on your mortgage is significantly higher (3.5% or higher) it may be a good idea to switch mortgages. In order to be eligible to switch mortgages, you must meet a few requirements. Your current mortgage must have at least €40,000 and 5 years left, you need a good credit rating, you can’t be in negative equity, and you must have at least 20% of your home paid off already.
There are several legal fees associated with switching mortgages but they can still provide a lot of savings, and sometimes the lender you switch to will cover these fees. Total switching costs should be at an absolute maximum of €2,000. In some cases, the lender you switch to may pay you more than you need to cover switching costs, the only issue is that the lowest rate offered by a lender does not typically include them covering switching costs. These deals can often seem unappealing, but many times the lowest interest rate is the best long-term option regardless of whether or not they cover the switching costs. So as long as you are eligible to switch your mortgage and you are able to cover the switching costs yourself you might want to consider doing the lowest interest rate possible as this will result in the most overall savings.
Conclusion
When considering different options for a mortgage, it’s important to know that there can be pros and cons to any choice. The most important thing is to be aware of how much risk you can afford to take on from a financial standpoint. Use the mortgage lending limits to get a general idea of how high of a loan you should ask for. Oftentimes, it is not wise to get the maximum loan amount that the banks allow. Based on the amount of money you have saved up and the time you have before you need a new home, decide how large your upfront payment should be. If you have a lot of money saved or a lot of time until you need your new home, it would be best to make a larger upfront payment. Look for the lowest interest rate you can find and in the current Irish mortgage market, a fixed rate is much safer. There are several free mortgage calculators available online if you wish to see the numbers behind different options. Finally, consider switching mortgages if you have a high-interest rate or are stuck with a variable rate, as switching could save you a lot of money in the long run.
Sources
- https://www.rocketmortgage.com/learn/how-much-down-payment-for-a-house#:~:text=A%2020%25%20down%20payment%20is,reap%20a%20few%20key%20benefits.
- https://www.bonkers.ie/blog/mortgages/switching-mortgage-what-are-the-legal-fees-and-which-banks-will-pay-them-for-you/
- https://www.bonkers.ie/guides/mortgage/when-is-the-best-time-to-switch-your-mortgage/
- https://switcher.ie/mortgages/mortgage-deposits/