It's natural for first-time buyers to have a lot of questions when it comes to applying for a mortgage. Here are some things to bear in mind before you begin your mortgage application process.
Buying your first home is a key chapter in your personal story. It’s also no small feat in this economic climate, so take a moment to congratulate yourself!
Learning about mortgages may seem overwhelming at first, but it doesn't need to be. Before you shop around for mortgages, it helps if you understand how they work, what are the main criteria and which schemes you might be eligible for. Once you have an idea of what having a mortgage entails, you’ll be ready to make a sound financial decision that will stand you in good stead for years to come.
Read on to discover answers to the following questions:
- What is a mortgage?
- What are the eligibility criteria?
- What are the types of interest rates available?
- Which mortgage measure is best for me?
- What is the help-to-buy scheme?
What is a mortgage?
A mortgage is a loan homebuyers take from a financial institution or lender before purchasing a property. As hardly anyone has enough liquid cash to buy a home outright, getting a mortgage means that your lender – normally a bank – buys and pays for your house, and over a number of years you repay them a monthly sum plus interest.
Mortgages are used to buy a home or to borrow money against the value of a property you already own.
A mortgage agreement between you and a lender gives the lender the right to repossess your property if you fail to make repayments. How many repayments you may miss before you lose your home, the penalties incurred, and other conditions that apply will depend on your mortgage agreement. This is why you need to read it carefully before you sign, and agree to repay only what you can afford.
Ireland has a number of different mortgage types and rates on offer. Each of these has its own advantages and disadvantages. Always shop around to get a mortgage until you’re sure you’ve picked the right one. Alternatively, get in touch with a broker who will assist you in finding the best deal.
How do you qualify for a mortgage?
You can apply for a mortgage from any lender. They will carefully evaluate your finances and level of risk and might refuse you if they believe you are not in a position to repay their money.
Overall these are the standard mortgage requirements:
- You need a secure income: You won’t be approved for a mortgage if you don't have a steady job with a stable income that helps you live comfortably.
- You need to prove you can afford it: Give your lender proof of recent rent and savings to show them you have done the math and can afford repayments.
- You need to have a deposit: This is the tricky part for many first-time buyers. You’ll need at least 10% of the purchase price in your savings. The good news is that if you’re a first-time buyer, you can benefit from schemes that reduce the deposit you need.
- You need a good credit history: Your lender will want to know if you can manage your money responsibly, with no outstanding loans or credit card debt. Student loan debt is normally not taken into account.
When it comes to criteria for getting a mortgage, the amount you take home in income also affects how much you can borrow. The Central Bank of Ireland places a cap of 4 times your gross annual income as your maximum mortgage amount.
Exceptions to this 4 times limit are difficult to come by, but you might be lucky in special circumstances.
Types of interest rates available in Ireland
Broadly speaking, there are three main mortgage interest rate types available for first-time buyers:
- Fixed rate: With a fixed-rate mortgage, you will pay an unchanged rate of interest for a certain number of years.
- Variable rate: With variable rate mortgages, you’ll pay whatever the interest rate is at the time.
- Split rate: This kind of mortgage is divided into multiple parts, where you could choose a part of the loan to have a fixed interest rate and the balance could have a variable interest rate.
Learn more about the various mortgage rates available and the pros and cons of each.
What are the types of mortgage measures available?
Mortgage measures are put in place to ensure that lenders lend money sensibly. These lending limits also help prevent home buyers from borrowing more than they can afford.
There are two types of mortgage lending limits:
- Loan to value (LTV): You must have a minimum deposit before you can get a mortgage. First-time buyers need to have a minimum deposit of 10%.
- Loan to income (LTI): This limit restricts the amount of money you can borrow to a maximum of 4 times your gross income. For example, a first-time buyer couple with a combined salary of €100,000 can borrow up to €400,000.
What is the Help-To-Buy scheme?
The Help-To-Buy scheme can aid first-time buyers by making the process of homebuying more affordable. Currently, you can only avail yourself of this scheme to buy a new-build house or apartment, not previously owned or second-hand properties.
Here's a quick overview of the help-to-buy scheme:
- It’s a tax rebate scheme provided by the Irish government for first-time buyers;
- The funds will go towards your deposit;
- You can get up to €30,000 (or 10% of the property price - whichever is less).
- The amount will depend on how much tax you paid over the last 4 years.
Since saving up enough money for a deposit is one of the first-time homebuyers’ biggest struggles, the help-to-buy loan can really help you get on the property ladder.
With the deposit taken care of, you’re free to concentrate on the more fun aspects of moving in–such as choosing furniture and throwing a housewarming party!
Finding a mortgage as a first-time buyer
Getting a mortgage doesn't have to be stressful, especially as a first-time buyer. If eligible, you should definitely take advantage of the help-to-buy scheme, which will give you enough of a deposit to afford a lovely new-build home.
Prior to applying for a mortgage, ensure that your finances are in order by:
- Gathering proof of stable income and rent payments;
- Paying off any debts you owe.
It would also be wise to learn more about the basics of interest rates: all you need to know is where they are now, and where experts predict they might head in the next few years. This will help you decide whether a fixed or variable rate mortgage is the better option.
If you wish to learn more about the homebuying process, feel free to check out our content hub for first-time buyers.