If you want to learn about mortgages there are a few places to start.
Firstly you can take a course such as the ‘Mortgage Diploma’ offered by the LIA (Life Insurance Association – www.lia.ie) and that covers the subject in the fashion you would expect from a textbook, I personally feel that it is a good grounding but nothing can substitute experience.
Speaking to a person with several years of experience will enable you to get an insight into the working elements of mortgages and the things that separate good mortgages from bad ones, all mortgages were not created equal!
The people with experience are Mortgage Brokers, Bankers, Financial Advisors, Accountants and Solicitors. That is not an exhaustive list but it does cover the main industry players and if you want to get a good grounding spending some time with any of these people will go a long way towards educating you about mortgages.
The elements that define mortgages (if we are to take the main things) are LTV (that stands for ‘Loan to Value’), Rate, Term, and of course the Mortgage Amount.
The LTV is the size of the loan versus the value of the property, so for instance an 80% LTV on a property worth 250k would be 200k. The quick method is to divide the loan by the value and multiply by 100. Loan to value is a vital element in lending, often the LTV will determine whether or not a bank will lend at all, then of course it can (and often does) determine the rate, a bank won’t normally lend above certain LTV’s depending on the type of client or the mortgage type they are seeking. For instance: 100% mortgages (which are getting more and more restrictive by the day) are specifically for first time buyers, in the realm of re-finance or re-mortgages certain -often attractive- rates are available only for LTV’s of 50-60% or less. And for investors LTV’s are usually looked at as the average over all the properties held.
Rate is also high on the list, even more so now in a market where pricing is the fundamental driver behind demand. Rates are determined in several ways, there are two types, those that change and those that don’t, the former cover Variable and Tracker Rates, the latter covers Fixed Rates. Variable rates are set by banks and can change at the banks discretion, they are normally linked in some way to the movements of the ECB but this is not always the case, the margin on them is usually higher than the good value trackers available. Tracker rates on the other hand are a mortgage that follow some underlying measure by a fixed margin for the duration of the loan, the underlying measure is normally the ECB (European Central Bank Base Rate) or the Euribor (European InterBank Ordinary Rate), in residential mortgages the ECB is the most popularly used base, however in commercial mortgages its normally the Euribor.
An important note is that recently part of the greater credit issue was the extremely high Euribor rate, it was almost a full 1% above the ECB, the Euribor is the price that banks tend to actually purchase their funds at, the ECB sells in such large sums that not every bank can afford to buy directly from them so there are other banks that are clearing houses for the Euro.
Historically the Euribor was not much more than the ECB and banks had confidence in each-other so the system worked and money flowed, however with the dawn of the Credit Crunch banks were all terrified of the level of exposure other banks might have and they were reluctant to sell money to them, this meant that there was demand pull inflation, people were all bidding on the same money and lending went up by 1% with no rate rise, so the margin on loans was based off of the ECB but the Euribor was higher than the margin charged, banks didn’t change overnight because they thought it wouldn’t last long but it did. If this is over your head and you really want to chat about it just call Irish Mortgage Brokers on 01-6790-0990 and I’d be happy to go into it further. In any case we are likely to see more banks doing trackers based on the Euribor so that this issue will not arise again.
Term is the number of years you want to borrow for, they range from (normally) 5 years to 40, however there are some restrictions, for instance a 40 year mortgage will normally have a caveat of ‘up to forty years or age seventy’ for instance, so if you are 40 years old you won’t be able to get a 40 year mortgage-because you would be 80 at the end of the loan, as well as that it wouldn’t (likely) make financial sense. Term is a big factor in determining repayments as well as the total amount of interest paid. For instance, if you borrowed 10,000 and paid it back over ten years (assume an interest rate of 0% just for this example) then you would have to pay back 1,000 per year. If you did the same loan over 5 years you would have to pay back 2,000 per year, now factor in interest, if you were paying interest then the longer you carry a balance the longer you are paying the interest so longer term = more interest but lower repayments.
Note: if you are considering a mortgage look at the amortization tables for different terms (we can email you one) and it will show you the difference that different terms make on your total interest paid and the relevant monthly payments.
Lastly there is the Amount Borrowed, which is often to the forefront of the borrowers mind but is actually one of the final considerations a bank looks at when they underwrite the mortgage. Things like the loan amount can sometimes be flexible whereas LTV and Rate are usually not. Historically loans operated on multipliers, so if you earned X amount you could borrow 3.5 times your salary or 4 times your salary, however that was replaced by ‘nets’ which is a better method I believe. This looks at your net income (after tax etc) and then applies a portion of it – typically up to 40% – and determines what amount of a loan that ‘Net Amount’ could purchase, it basically works the figures backwards to an extent. However, in Ireland our lending has proved to be good for the most part, given our number of mortgage holders the number of defaulters is exceptionally low, a sign of solid underwriting and an effective and honest broker market.
If you ever have any specific questions about mortgages you can email us on the home page (fill in the purple enquiry box) or call one of our consultants and we’d be happy to assist you.
There are of course other factors that influence a mortgage but if you have a solid understanding of the above four then you are 90% of the way towards understanding residential mortgages.