Buying a home is likely to be the biggest investment you’ll ever make – financially and emotionally. Therefore, asking how much can I borrow for a mortgage is a necessary question to understand fully before you commit to borrowing.
Whether it’s a first home, an upsize, a downsize, or a buy-to-rent investment, it’s important to know the rules of this game. While they’re generally fairly straightforward and well-documented, there’s also a certain amount of flexibility based on your financial history and circumstances.
The Central Bank of Ireland governs the criteria around mortgage lending to ensure it’s done fairly and wisely. The first concern is that people shouldn’t be encouraged to overspend and the second is to avoid a credit burden on the Irish economy.
Where to start
Before you begin looking at properties and thinking about whether you need a studio apartment or a sprawling family home, there’s the question of affordability. This is based on your earnings vs costs. It’s referred to as the ‘loan-to-income limit’ (LTI) which allows you to borrow a maximum of 3.5 times your gross annual salary.
So, if you and your spouse earn €100,000 per annum combined, your loan amount could be €350,000.
A loan amount of this nature has yet to consider your other financial commitments.
While it’s tempting to borrow to the limit, it’s unwise to do so. It allows no buffer for financial emergencies or savings. Rather commit to a lower mortgage repayment and a cheaper home, but create a nest-egg or pay the mortgage off sooner.
Also, once you own a home, you’ll discover the burden of hidden costs, from small maintenance issues to bigger-ticket problems like burst boilers or rising damp. These sneak up on you when you least need them. There’s nothing worse than having to use the money you’ve saved to do some renovating on a silly home-emergency.
Many lending institutions have their own mortgage calculator and it’s worth checking out what benefits they’re willing to offer to get you on board. Our mortgage calculators page on our website offers a range of calculators depending on whether or not you’re a first-time buyer or investor. It looks at affordability, monthly repayments, remortgaging calculations, the benefits of increasing your payments, among others.
It’s up to the bank or lending institution to assess how flexible they can be on their lending limits. Under the Central Bank guidelines a lending bank may approve 20% of its lending book on exception. As mentioned, this would depend on a range of factors including your relationship with the institution, your financial history and how your mortgage application is presented to the lending bank.
Similarly, there is flexibility within the deposit amount. (Click here for tips on how to save for a mortgage.) A minimum deposit is necessary in order to secure a mortgage from any institution. This is known as the ‘loan-to-value limit’ (LTV) and while it is somewhat discretionary, rule of thumb says that first-time buyers need to put down 10% of the value of the property as a deposit.
Second-time (or more) buyers must commit a 20% deposit, and buy-to-let buyers, 30% deposit. However, lenders can give exceptions to these rules. It is possible for second-time buyers to get a 90% loan in certain circumstances and in rare circumstances a first-time buyer can get a 95% loan.
Once you know what your limits are when it comes to a mortgage, it’s well worth shopping around for a good interest rate. A fraction of a percent can have a big impact on the cost of the loan and negotiating with your lending institution will save you a pile of money in the long run.
To illustrate: a mortgage of €200,000 over 20 years at 3% interest, will cost you €266,160 over the life of the mortgage.. The same loan amount at an interest rate of 2.5% will cost you €254,160 in total, a full €12,000 less.
While a longer loan period may seem attractive because of the lower monthly repayments, you’re ultimately paying more over time. The shorter the loan period the less it will cost you, however, the maximum or minimum term are unlikely to be a good fit for anyone.
New homeownership is an exciting time but also an expensive time ! It is therefore important to strike the right balance between paying as much as you can, as soon as you can and minimising your overall spend and scheduling the payments over a long enough time frame that you can still afford , so you don’t have to unduly compromise your lifestyle.
Why not speak to our experts or run our easy to use calculators which can support you in identifying the term and mortgage that is ‘right for you ‘ .
Once you’ve been to your bank and had the necessary discussions, you’re likely to get an ‘Approval in Principle’. Something to be aware of is that this will likely only last for six months and then you’ll need to reapply. Theoretically, that shouldn’t be a problem, but your situation will be reviewed and any changes will affect your approval.
We help interested buyers like you secure mortgages every day of the week. Contact us to find out how we can help you.