Taking out a mortgage
If you are buying a home, you will probably have to take out a mortgage, which is a long-term loan to finance a property purchase.
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If you are buying a home, you will probably have to take out a mortgage, which is a long-term loan to finance a property purchase. If you cannot get a mortgage from a commercial lender (bank) you may be eligible for a loan from a local authority. As your home will be secured against the loan, you must keep up your payments or risk losing your home.
This document outlines some issues to consider when thinking of taking out a mortgage, topping up an existing home loan or switching to a different mortgage product – known as a switcher mortgage. It is aimed at private individuals who are buying their own homes.
Note that mortgage interest relief is no longer available for new mortgages. However, if you are a first-time buyer, you may be entitled to claim First Time Buyers’ Relief, which is a refund of Deposit Interest Retention Tax (DIRT).
An income tax rebate, the Help-to-Buy (HTB) incentive, aims to help first-time buyers of newly built homes to fund the deposit required. It also applies to once-off self-build homes. It consists of a rebate of income tax paid over the previous 4 years. It will run until the end of 2021.
Will my mortgage application be affected by COVID-19?
If you have an existing mortgage application, the following advice applies:
- Your existing mortgage approval (known as approval in principle) is not effected by the COVID-19 emergency
- You may be able to get an extension of 3-6 months on your approval in principle from your lender – if your financial circumstances have not changed
- Before the official mortgage approval or letter of offer is finalised, your lender may ask you to confirm if there is any change to your financial circumstances as a result of the COVID-19 emergency
- Where your circumstances have changed, you may have to provide your lender with up to date information on your income and employment situation
- This is part of the normal loan approval process where lenders make sure that the loan is affordable and suitable for you
Lenders are still accepting new mortgage applications. The BPFI has a COVID 19 FAQ which gives advice on mortgages.
Commercial lenders offer a range of mortgage rates and products. Before starting to look for a home, you should check with potential lenders to get a statement of how much they are prepared to lend you. This is called approval in principle. Getting approval in principle will indicate what price range you can consider when looking for somewhere to buy.
However, approval in principle doesn’t mean that the lender has approved a mortgage and agreed to lend you this amount. The official mortgage approval is contained in a letter of offer, which the lender will only issue when it is fully satisfied with certain matters, including a valuation of the property you are buying.
Mortgage lending limits
In February 2015, the Central Bank made Regulations to set limits on the size of housing loans made by the commercial lenders that it regulates. Following an evaluation and consultation process, revised limits took effect from 1 January 2017, under further Regulations.
A second annual review was carried out in 2017. Following this review, the Central Bank made new Regulations (pdf), which take effect from 1 January 2018.
The core elements of the measures, the loan-to-income (LTI) and loan-to-value (LTV) limits, both described below, have not changed for 2018. However, the rules have changed for 2018 as regards the flexibility that lenders have to make exceptions to the LTI limit.
The limits are described on the websites of the Competition and Consumer Protection Commission and the Central Bank.
Scope of limits
Equity release and top-up on an existing mortgage are both within the scope of the limits, but they do not apply to switcher mortgages, or to the restructuring of mortgages in arrears or pre-arrears.
How the limits work
There are 2 types of limit – one based on the ratio of the loan to the price of the house – known as loan-to-value or LTV – and the other based on the ratio of the loan to the income(s) of the borrower(s) – known as loan-to-income or LTI. In general, both of these limits will have to be met for the mortgage to meet the Central Bank’s requirements. However, the Regulations allow lenders to be flexible in some cases – see ‘Lender flexibility’ below.
As well as meeting the limits, the lender must also assess each loan application on a case-by-case basis – see ‘Assessment by the lender’ below.
Loan-to-income limit (LTI)
There is a general limit of 3.5 times gross annual income for all new mortgage lending for principal dwelling homes, with some scope for flexibility. This includes lending to people in negative equity who are applying for a mortgage for a new property. This limit does not apply to buy-to-let mortgages.
Loan-to-value limit (LTV)
There are different limits for different categories of buyer. Again, lenders have some scope for flexibility – see ‘Lender flexibility’ below.
The valuation of the property must have been carried out no later than 4 months before the date of the mortgage agreement.
Up to 31 December 2016: For first-time buyers of principal dwelling homes there was a limit of 90% LTV on the first €220,000 of the value of a residential property, so first-time buyers needed a deposit of 10% for a house or apartment costing €220,000 or less.
A limit of 80% LTV applied on any excess value of the property above €220,000, so first-time buyers needed a deposit of 10% on the first €220,000 and 20% of any balance above €220,000.
Since 1 January 2017: For first-time buyers of principal dwelling homes the limit of 90% LTV applies on the full value of all residential property, so first-time buyers will need a deposit of 10% for any house or apartment, regardless of price.
For non-first-time home-buyers, there is a limit of 80% of LTV on new mortgage lending, whatever the price of the property, so they will need a deposit of 20% of the total purchase price.
For properties other than principal dwelling homes, including buy-to-let properties, a limit of 70% LTV applies.
The LTV limits do not apply to borrowers in negative equity applying for a mortgage for a new property. However, lenders may still opt to apply stricter lending standards, based on their assessment of each case.
Loan-to-income limit: The Central Bank rules originally allowed discretion for lenders to exceed the LTI limit of 3.5 times income in up to 20% of cases in any calendar year.
With effect from 1 January 2018, in any one calendar year they can give exceptions to:
- Up to 20% of the value of mortgages to first-time buyers
- Up to 10% of the value of mortgages to second and subsequent buyers
Loan-to-value limit: Originally, the rules also allowed for 15% of total lending for all primary dwellings in a calendar year (for all buyers, first-time and others) to be above the LTV limits.
Since 1 January 2017, the revised rules allow for 5% of the value of new lending to first-time buyers for primary residences in a calendar year to be above the 90% LTV limit. They allow for 20% of the value of new lending to second and subsequent buyers for primary residences to be above the 80% limit.
Summary of LTV limits
|Type of buyer||House price||Maximum limit of mortgage – up to end 2016||Maximum limit of mortgage – since January 2017||Minimum amount of deposit – up to end 2016||Minimum amount of deposit – since January 2017|
|First-time||Up to and including €220,000||90% of house price||90% of house price||10% of house price||10% of house price|
|First-time||Over €220,000||90% of the first €220,000plus 80% of the excess over €220,000||90% of house price||10% of the first €220,000plus 20% of the excess over €220,000||10% of house price|
|Not first-time||Any||80% of house price||80% of house price||20% of house price||20% of house price|
|In negative equity on current mortgage||Any||These limits don’t apply but the lender’s own limits may be stricter|
|Buy-to-let or other non-principal dwelling||Any||70% of house price||30% of house price|
Assessing a mortgage offer
It is very important for you to be satisfied that the mortgage is affordable from your point of view and that it is sustainable – you should be able to keep up the repayments over the lifetime of the mortgage.
Information about the offer
Under the European Union (Consumer Mortgage Credit Agreements) Regulations 2016, which transposed the Mortgage Credit Directive into Irish law, the lender must provide you with a European Standardised Information Sheet (ESIS), setting out the details of the mortgage offer. The Regulations specify the detailed information that the ESIS must contain, which includes:
- How long the offer will be valid for
- Contact details of the lender or their representative
- Main features of the loan, including potential risks
- Type and duration of credit
- Full details of borrowing rate(s) and when and how they may be revised, if applicable
- Total amount that you will pay over the lifetime of the mortgage
For a full specification of the ESIS and instructions on what it must contain, see Schedule 2 of the Regulations.
You can use the information in the ESIS and other sources to assess the mortgage offer.
Other sources of information
Information on the various types of mortgage is available on ccpc.ie, along with a set of mortgage calculators that you can use to work out your monthly repayments and the effects of a rate change.
You should work out your income and expenditure and assess how they are likely to change over time, depending on your employment situation, your family situation and your stage in life. You can use these budgeting calculators as a starting point.
You may wish to look for financial advice. You can find out the different types of adviser available on ccpc.ie. It lists questions to ask and steps to take when shopping around for financial advice.
A mortgage loan is a serious and long-term commitment. You’ll need to do your research and ask some questions about the loan and its implications over the long term, such as:
- How does the interest rate (APR) compare to others in the market?
- Research the lender’s policy and track record on changing interest rates. Even a small variation in interest rates can have a large effect on the overall cost of your mortgage. You can use this mortgage rate calculator to assess these effects.
- Can I realistically afford to keep up the monthly payments if my income falls or my outgoings increase? You need to assess your continuing ability to repay as circumstances change over time.
- If I accept an introductory offer, will I be able to manage when the ‘introductory’ period is over? Again, you need to calculate your ability to repay – over the full term of the mortgage, not just the first few years.
- What insurance do I need on the mortgage? Read about insurance protection on mortgages.
Assessment by the lender
In addition to the Central Bank’s lending limits, its Consumer Protection Code 2012 requires all regulated lenders to assess your personal circumstances and financial situation thoroughly before agreeing to provide a mortgage.
The lender must carry out detailed assessments of the affordability of the product being offered and of its suitability for you. When offering you a mortgage, the lender must give you a written statement, setting out the reasons why the mortgage product being offered is considered suitable for your needs, objectives and circumstances.
The European Union (Consumer Mortgage Credit Agreements) Regulations 2016 also require lenders to conduct a creditworthiness assessment prior to offering a mortgage loan.
Paying the mortgage
Once you have taken out the mortgage, you are now committed to paying the monthly instalments as agreed in the contract with your lender. You should keep all correspondence and documentation from your lender in a safe place, as well as documents relating to insurance on your mortgage, house and contents.
It is very important to keep up your mortgage repayments. If you don’t, your credit history will be damaged and your home will be at risk.
Problems paying the mortgage
If you are having difficulty managing your finances, there are several things you can do. The Money Advice and Budgeting Service (MABS) can help you to review your income and your outgoings, make out a budget and deal with your debts in general.
Even if you have not yet missed a mortgage payment, you are protected by the Central Bank’s Code of Conduct on Mortgage Arrears if you contact your lender and let them know that you are having a problem.
To discuss these and other options, you can call the MABS Helpline at 0761 07 2000 (9am – 8pm, Monday – Friday) or email email@example.com.
If you find yourself in serious mortgage arrears, you may be able to get free mortgage arrears support under the Abhaile scheme.
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