It’s no secret that house prices are continuing to rise in Ireland. Because of this, it is more important now than ever to maximize the amount that you are allowed to borrow. The Central Bank’s rules often do not make this process any easier, as many have criticized the Central Bank on its restrictive rules in terms of how much people are allowed to borrow. To be approved for a mortgage in Ireland, you first have to fall within the Central Bank’s income rules. Second, your lender will evaluate your repayment capacity.
First, the Central Bank restricts lenders to loans of 3.5 times the borrowers’ income (joint and single), unless they are granted an exemption. This means that someone making €40,000 can borrow up to €140,000, and a couple making €100,000 combined can borrow up to €350,000, respectively. However, to be approved for a mortgage, they must also pass a stress test, per Central Bank rules. This tests the ability of the borrower to repay the loan each month should interest rates rise by 2 percent above what the lender is offering them.
For example, EBS uses a stress test rate of 5.7 percent, or 2 percent above its standard variable rate of 3.7 percent. After this, the lender has a specific amount of income that the borrower has to reach each month after all expenses and future mortgage payments have been paid. This can sometimes reduce repayment capacity, and thus hold borrowers back from the 3.5 times income maximum set forth by the Central Bank.
For example, a single applicant needs to have €1,400 in their bank account after all expenses and mortgage payments have been deducted, according to EBS. So if a single applicant making €30,000 attempted to borrow the maximum of €105,000, they will earn €2,121 a month after taxes, and be above the bank’s threshold of €1,400 a month after a €443 mortgage payment. After the stress test is applied, however, the mortgage repayment would be €629 a month , dropping them below the bank’s limit.
Thankfully, there is a way to get around all these stress tests that more and more borrowers have been taking advantage of: long term mortgages. According to the Central Bank, stress tests don’t apply to mortgage products when the rates are fixed for 5 years or more. This means that the borrowers have a higher possibility of securing a larger loan, and therefore having the ability to be more competitive in the market for buying homes. One such product is Avant Money’s new 30 year “One Mortgage” loan. The interest rates on this loan remain fixed for the whole term, so stress tests don’t apply. Avant Money says that this loan would allow two applicants with a combined income of €86,000 to borrow €300,000, the full amount of 3.5 times their income. If this same couple was to opt for a loan with a fixed term of under 5 years, and standard stress tests like the ones used by EBS are applied, they only will be able to borrow €274,000, 9.5 percent less than with the 30-year “One Mortgage”, and only 3.1 times their income. While there are some downsides to long-term fixed rate loans, such as break fees if you decide to remortgage or switch, these products may be beneficial to you if you are looking to maximize the amount you can borrow.