Sunday Business Post - November 26
First-time buyers should do as much research as possible before deciding which mortgage product to choose, and enlist the assistance of a knowledgeable and informed mortgage broker or expert.
“The most important thing from a first-time buyer’s perspective is to make sure that they are getting a complete overview of the market and all the products available to them,” said Mark Purcell, Sales Director with A Better Mortgage in
The first thing that a mortgage broker will discuss with a potential customer is the amount of money which it will be possible to borrow. A number of different factors affect this figure. These include the individual or couple’s salary, their savings, the term of the mortgage, the type of interest rate, and their prior credit record.
“Brokers and lenders will try to ensure that the customer is bringing a clean credit history. Other issues would be other debt they are servicing, specifically short term debt, car loans, credit card borrowings etc,” said Gary Prizeman, Head of Sales at ICS Building Society.
While most banks use similar criteria, it is important for customers and their brokers to explore all potential avenues to secure the best deal. Purcell says that different banks assess a customer’s ability to repay the loan in different ways.
“Most of the banks look at somebody’s net disposable income. They will take a certain percentage of that in an environment where interest rates are 2% higher than the current standard variable rate. However some banks will look at it on a 3 year fixed basis, which enables somebody to borrow that little bit more,” said Purcell.
Mortgage providers offer a number of different interest rate mechanisms over the term of the loan, which can have an effect on the monthly repayments. The concepts are ‘Fixed Rate’ – where for a set period of time, typically up to three years, the repayments do not change. ‘Variable Rate’ mortgages move roughly in line with European Central Bank interest rate changes, while ‘Tracker Rates’ are a combination of the two, and move in relation to ECB rates, but within certain margins.
“It is really down to somebody’s attitude towards risk. We are in an environment of increasing interest rates at the moment. You are going to pay more for a fixed rate, but you are buying comfort and peace of mind,” said Purcell.
Once customers have worked out how much it is possible to borrow, they can decide on whether to take out a 100% mortgage, or whether it might be possible to use funds from other sources, such as savings or family assistance.
100% mortgages are a relatively new product on the Irish market, and have been introduced primarily because of the continued high rates of house price growth in
“The difficulty for customers who are renting and trying to save for a deposit was that property prices were continuing to increase and it was taking them longer to get their deposit. Now they don’t need to, the 100% allows you to get onto the property ladder faster,” said Niall O’Grady, Head of Marketing with Permanent TSB.
Given the state of the property market at present, for many customers, especially individuals attempting to buy on their own, some kind of financial assistance is required.
“More and more, particularly first-time buyers are being supported by their parents. Not just going guarantor, but actually presenting their offspring with monetary gifts which they put towards their mortgage purchase,” said Prizeman.
There are potential Capital Acquisitions Tax (Gift Tax) complications to these gifts. A threshold of €478,155 applies to gifts/inheritances made by a person to his/her child, however for other family members such as brothers, sisters, nieces or nephews the threshold is only €47,815. Any gift over this amount is taxed at 20%.
As the Irish mortgage market is so competitive at the moment, financial institutions are constantly vying for the customer’s attention, and one way of differentiating themselves is to offer enticing flexible features and introductory offers.
Such flexible features can include very low fixed rates over the first few years of the mortgage, the possibility of taking repayment breaks, skipping a set month every year, the ability to overpay or underpay at certain times or to reduce or increase the term of the mortgage going forward.
However, Purcell counsels that the most important factor remains the total cost you will pay at the end of the day.
“What people have to look at is the overall deal. A mortgage isn’t a two year product, it is significantly longer. There are introductory rates for one year or even two years in certain cases, but people should look at what happens after that,” said Purcell.
“Does taking a discount product disqualify them from taking cheaper variable rate products later? Also just because someone has the cheapest discount rates on the market doesn’t mean that after the initial period they have the cheapest solution over the long term,” he added.
Stamp duty is another important consideration for first time buyers, and one that can add a significant cost to the total purchase price of a property. At present, first-time buyers are exempt from paying any stamp duty on the first €317,500 of the purchase price. After this amount there are rates of 3%, 6% and 9% as the total price tops €317,500, €381,000 and €635,000 respectively.
Although there has been a lot of press coverage recently over possible increases in these stamp duty thresholds in the forthcoming budget, those in the business aren’t expecting any fireworks on budget day.
“There have been some talks about changes to the stamp duty regime in the forthcoming budget, but we wouldn’t expect any significant changes,” said O’Grady.
Once you have decided how much money you have to spend, your mortgage broker or financial institution can look to secure mortgage approval for that amount. Then, and only then, is it time to start looking seriously at the location and type of property which you are able to purchase.
“We would always say to somebody to get their approval first. People generally know their budget then, and then they can go out and look at properties and locations where the can afford to buy. That saves lots of money in shoe leather, pounding pavements and looking at houses that they just won’t be able to afford to buy,” said Purcell.
After the customer has found a property that they wish to purchase, and has secured approval for the amount they wish to borrow, there is a good deal of paperwork to get together. At this stage customers enlist the services of a solicitor who should look after all the conveyancing issues.
It is important for first-time buyers to shop around when choosing a solicitor. Some solicitors can charge up to 1% of purchase price of property. If you are buying €450,000 house, this means a cost of €4,500 plus vat plus outlay. An option is to work with your broker, who may be able to arrange single price conveyancing at, for example, €850 plus vat.
There are also supplementary products which a mortgage holder must also bear in mind. House insurance is generally required by the financial institution, while anyone under 50 years of age must take out mandatory mortgage protection cover.
Given the complexity and additional issues involved in deciding on the right mortgage product and going through with the property purchase, not to mention the other concerns involved with choosing the right property and physically moving house, it is a good idea for purchasers to surround themselves with the best possible advice.
“Emotionally buying their first home is a very traumatic time for customers; probably the biggest potential transaction customers have in their life. So it is vital that they go to a provider who has good experience of handling first time buyers as they tend to know the things that can go wrong and they can advise customers how to avoid them,” said O’Grady.
Jargon guide: (source IFSRA)
APR This stands for annual percentage rate - the annual rate of interest charged on a loan. It takes account of all the costs involved over the full term of the loan, such as any set-up charges and the interest rate. It provides a good comparison of costs between alternative loans.
Stamp Duty This is essentially a document tax payable to the government on the purchase and mortgage of a house. Various rates apply, depending on the size, purchase price of the house and the status of the buyer.
Collateral Term used to describe security for a loan - usually an asset such as an existing property or investment policy.
Conveyancing Technical term for the legal process of buying, selling and mortgaging a property.
Debt Consolidation Also called 'wrapping up your debt' - refers to the practice of taking out one single loan (mortgage) to pay off various individual loans.
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