The mycash.ie quick guide to mortgages

We all need a place to live so you might as well own yours. The financial benefits are clear. Over the long term, capital growth is pretty much assured. Add to this the saving on rent and the responsibility of owning your own home becomes worthwhile. Essentially, owning your own home doesn’t just feel good for its own sake, it is a major financial investment.

First timers

When it comes to your dwelling-place you have two options: rent or buy. Runaway house prices over the last decade meant that most people couldn’t buy fast enough. But with the market slowing to more normal house price growth levels, it’s worth taking the time to consider.

Unless you take the view that house prices will fall over the long term (20 years or more) then the decision to buy is in most cases a fairly obvious one. If you want to see what you can get for your money a good place to start is the mycash.ie Mortgage Payoff simulator.

Buy to Let

The decision on whether or not to buy an investment property is usually not as straightforward as buying a first home. First, there’s no rental saving; second, there are additional costs and tax to consider. Use the mycash.ie Buy-to-Let simulator to get to grips with the factors involved in buying an investment property.

Getting a mortgage

Banks lend on the basis of your income and what you can afford. This means you will need evidence of your income usually in the form of payslips and P60s. If you are self-employed you will need audited accounts.

If you are carrying too much debt the bank may question your ability to repay. You will need to provide bank statements to show your overall level of borrowing. Your credit history is also important and this will be reflected in your credit rating. You may have difficulty securing adequate levels of credit for other reasons – perhaps you are self-employed – in which case you can apply to a specialist mortgage lender.

Before you think about taking out a mortgage or changing your existing mortgage arrangements, it’s a good idea to take stock of your overall financial position. Start with the mycash.ie Household Budget simulator to see what you might be able to afford monthly. It’s also a good idea to get an idea of how your finances are structured – your personal balance sheet – by using the mycash.ie Net Worth simulator.

All banks have different criteria for how much they will lend but there are general guidelines. Depending on your circumstances it is possible to get up to five times an individual salary or joint salary in the case of a couple.

You will usually need to put down a deposit. Yes, there are 100% mortgages out there, but more often than not a lender will require a deposit in the region of 10% of the purchase price.

Remember that you may need to provide for stamp duty of up to 9% of the purchase price as well as meet solicitor’s and valuer’s fees. First time buyers are exempt from stamp duty on newly-built properties.

 

Types of Mortgage Rate

Mortgages rates can be Fixed, Variable or a split of Fixed and Variable.

Variable Rate
A standard variable mortgage rate can move up or down and typically moves according to changes in the European Central Bank (ECB) rate. Some banks don’t always change their rates precisely according to ECB rate changes.

A tracker variable rate precisely tracks movements in the ECB rate. A tracker rate could, for example, be set at the ECB rate plus a margin of 1% for the lender. A change in the ECB rate would then be precisely matched by the change in the lending rate.

Discounted, capped or loan-to-value (LTV) rates are also variable. A discounted rate is temporary and set below the regular standard or tracker variable rate for a period. A capped rate guarantees not to go above a certain rate for a certain period of time. An LTV rate is a preferential rate based on the amount of your mortgage as a proportion of the value of your home. If this proportion is small, say 50%, you may qualify for a preferential LTV rate.

Fixed Rate
It is what it says. A fixed rate mortgage fixes your repayments for a specific period, usually up to five years. This type of mortgage will usually be more expensive than variable rates in the short term (except if interest rates are falling sharply).

Fixed rates give you certainty with regard to repayments over a period but beware of cheap fixed rates that jump once the agreed term ends. If you hold a variable rate or tracker mortgage, you might consider going on to a fixed rate when variable rates are rising. If you break a fixed rate contract to go to a standard variable rate or tracker, there will be a penalty and it can be substantial.

With a fixed rate you are paying for the comfort of knowing exactly what you will have to repay each month and that is why a fixed rate is often higher than variable. An exception to this would be when interest rates are high and moving downwards: then the fixed rate might be lower than variable but this may only be temporary.

 

Mortgage pricing

Mycash.ie has a comprehensive, live mortgage pricing engine where you can enter your requirements and get a listing of suitable products and prices. You can rollover the headings to see what they mean.

Mortgages are priced according to their Annual Percentage Rate (APR). This is the yearly rate of interest but includes all other costs such as setup fees and so is better for comparison purposes than the official rate.

To assess what you can afford, use the ‘cost per thousand’ (CPT) figure. Simply multiply the CPT by the size of your mortgage (in thousands of euro) and you will get your monthly repayment. So, for example, if the relevant CPT is 5.25 and you are looking for a €200,000 mortgage you will have a monthly repayment of €5.25 x 200 = €1,050.

 

Payment options

With mortgages, you have many choices depending on your circumstances. You may wish to try and pay off your mortgage as soon as possible. On the other hand, you may wish to suspend payments or revert to interest-only payment if times are hard and/or interest rates rise.

The length of mortgage term you choose will also affect repayment levels. Choosing a longer term leads to lower monthly payments but higher interest payments over the full term. Remember that if you are on a variable rate you should recognise that interest rates may rise and be prepared for this.

Use the mycash.ie Mortgage Payoff simulator to work out the best package for you based on what you can afford. It will also show you the effect of interest rate changes on your monthly repayments.