Buying your first home is a bit like the Hunger Games. The deposit, mortgage approval, finding a property and then battling other bidders to take the prize uses a lot of head space.
One in eight homebuyers in the Republic used a gift or an inheritance to help them get on the property ladder, according to new research by the Banking and Payments Federation of Ireland. Last week, a Bank of Ireland report found that almost 40 per cent of Irish housing transactions are now settled at a 10 per cent premium above the original asking price, reflecting “the intense competition for homes”.
Some buyers can’t think beyond getting their hands on a set of keys. Crossing that threshold may be the end of your house hunt, but it’s only the start of your mortgage – a commitment that will shape your finances in the decades ahead. Here are the factors to think about before signing on the dotted line.
Fixed or variable?
The big focus for first-time mortgage applicants is: “Will the bank give me what I need?”
With estate agents reporting 20 to 30 parties at some first-time buyer property viewings, house-hunters want a bank that will loan them enough to make that winning bid. Getting the right lending rate, however, is crucial to meeting repayments over time, and to paying less interest.
Opting for a fixed rate, at least for the first few years, can give new homeowners some certainty.
“We suggest to first-time buyers that they very, very much hone in on the first three to five years of their mortgage,” says Trevor Grant of Affinity Advisors and chair of Irish Association of Mortgage Advisors. “They haven’t owned a home before, they will need to buy things, things will break, life will happen, so it’s important to give yourself a bit of a cushion and to know how much you are going to be paying each month.”
Yes, ECB rates have started to come down, and many are wondering how low they will go, but the drop doesn’t necessarily mean first-time buyers should go variable. For now, most fixed rates represent better value than variable rates, says Grant.
“Take the variable if you really want, it’s not going to go up any time soon, but you will be paying more for a variable than a fixed rate,” he says.
Those taking a variable rate tend to have more risk appetite and can react to fluctuations in the market if repayments rise, says Aisling McNamara, a mortgage adviser with Mortgage123.ie.
“You might take a chance and take a 3.5 per cent interest rate, but the days of your 2.5 per cent, or 2.8 per cent are long gone,” says McNamara. “Anything from 3 per cent and up, up to 3.8 per cent, is considered fairly good value at the minute.”
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Cash back?
When you’ve put every penny you have towards a deposit, it can be hard to know how you’ll fund a sofa for your new pad. A mortgage with a cashback sweetener can seem like manna from heaven. You need to think long term, however.
“The interest rate is always going to be higher with a cashback offer,” says McNamara. Though tempting, cash back only makes financial sense for a certain group of buyers. It depends on your loan to value ratio, she says.
“If you are coming with the Help to Buy grant and you have the full 10 per cent deposit and you are in a position to have 80 per cent loan to value, that’s when you benefit from cashback offers,” she says.
The interest rate will be lower when you have borrowed less. Those borrowing 90 per cent of the value of their house however will pay more in interest with a cashback offer.
“It’s about weighing up if you are borrowing a high loan amount, how much cash back you are going to get, how that is going to benefit you and what position you are going to be in to switch to a better rate in three or five years time,” says McNamara.
If after you get your mortgage you take out short-term debt such as a car loan, or you have children and reduce your working hours, this can impact your repayment capacity, inhibiting your ability to switch to a cheaper mortgage rate. You’ve spent the cashback money on a sofa, but now you’re stuck on a higher interest rate.
Will you have paid as much if not more in higher interest in your fixed-rate period than you got in cashback? A good broker will crunch the numbers for you.
Mortgage term
A mortgage for 25 years, 30 years, 35 years – does it matter? The future is a foreign land, but first-time buyers should give thought to their mortgage term.
Just one in five first-time buyers these days are aged under 30. Indeed, the median age of first-time borrowers hit 35 last year, according to the Banking and Payments Federation. Some 44 per cent of people were older than that.
Mortgage terms can span from five to 35 years. The longer the term, the lower your monthly repayments will be. That means paying more interest, though. With a shorter term, the monthly repayments are higher, but because you are paying the loan down faster, you pay less interest.
Don’t put yourself under too much pressure with a shorter term, give yourself some wriggle room, says Grant. He advises opting for a 30-year term initially.
“Get through the initial fixed-rate period and after that, you can consider reducing the term if you want,” he says. It’s easier to shorten the mortgage term than extend it – asking the bank to do so is likely to make them nervous about your repayment capacity.
“Clearly, the goal is to pay it off early, but reassess where you are, which you should be doing anyway after your fixed rate expires,” says Grant.
“Once you’ve been in the house for three to five years, then you will have a sense of what paying a mortgage is like and the extra costs of running a home and you can either reduce the term or start overpaying.
Roll off a fixed rate
Just because you signed up with one lender doesn’t mean you have to stick with them for life. When it comes to your mortgage, it pays to be promiscuous.
For example, a first-time buyer who bought a home five years ago will now be rolling off a fixed rate in the 2 to 3 per cent range on to a variable rate – this means a big jump in repayments.
“The jump with their existing lender is very significant, so they need to look at moving,” says Grant. Moving lender for a better rate throughout your mortgage is wise, but you will have to prove your repayment capacity again and you should plan for this.
Six months out from the end of your fixed rate, contact a mortgage broker who can help you get your finances to get the best rate. Nobody loves going through the hoops of mortgage approval again, but if it could save you a couple of hundred euro a month over the next three to five years, it’s worth it.
Your ability to switch to score a better rate with a new lender will be shaped by your circumstances, says McNamara.
“Most people go into mortgages with no debt, but know they will need a car loan, for example, afterwards – that typically costs €400 or €500 a month. Have a conversation with your mortgage broker about your long term plans and they can guide you.”
If you are switching lender, find out if they will let you overpay. This will reduce the cost of your mortgage too.
Room to improve?
If your medium-term plan is to renovate, retrofit or extend your new home, and you will need to borrow to do it, talk to your mortgage broker about this.
Did you max out your borrowings when getting your mortgage, borrowing to the full limit of four times your income? Has your household income increased since you took out the mortgage? Has the value of the property increased? These factors will impact your chances of releasing equity from the property to pay for your renovation.
Equity release is a way to turn some of your home’s value into cash. It effectively swaps a percentage of your property value for money.
Your ability to release equity will depend on your current loan to value ratio, what extra debt you might have taken out and your earnings, says McNamara. If you’ve taken out a car loan and your household income has taken a dip because of caring periods for children, this will have an impact.
“If you wanted your typical extension at the back, costing €50,000 to €100,000, it generally depends on your current borrowing capacity and what you initially borrowed to buy the house,” she says.
If you are buying a doer-upper, think how your time frame for renovation maps to your personal plans. If one earner is on unpaid parental leave, for example, this may impact the amount you can borrow. Once you’ve drawn down your loan, your personal circumstances are your own business, so long as you can keep making the repayments.
If you plan to renovate your home in future, be careful when switching your mortgage, says Trevor Grant. He cites one mortgage holder with 12 years remaining on their mortgage who switched lender, but kept the term the same.
“They wanted to do significant home improvements and their new lender told them they could only have the money over the same term and it made no financial sense,” says Grant.
If you are moving lender, check if they will only release funds on the same mortgage term or if they will be flexible, he says.
“They moved to a lender that was offering an incredibly great rate and now they are having to give up that rate to do renovations on their home,” says Grant.
