With Irish people reported to have saved more than €13b during the pandemic, while adapting to remote working and achieving a better work/life balance, many are now looking to take control of what happens next as they consider their future.
The pandemic triggered a lot of new perspectives for Irish people, not least around lifestyle, family well-being and the home. Remote working became a catalyst for change as the daily commute disappeared and people have had more time to look around at their homes and how it meets their family needs. The appetite for building, extending and trading up and even away from urban locations to more space, amenities or proximity to the family network is growing. Here we look at what’s involved in trading up, and if it’s the right time to move to a property more suited to your needs? Before you take that step onto the next rung of the property ladder Joey Sheahan, Head of Credit at MyMortgages.ie and author of The Mortgage Coach recommends some key steps as you plan your next move:
Hold onto your cash
If you are thinking about trading up, it’s wise to keep your powder dry, i.e. hold onto your cash reserves. Lenders want to see that you have 6 months of savings to cover your mortgage repayments in the event of unexpected expenses and in order to avoid early default. Just to be clear, cash or liquid assets include balances in current and savings accounts and investments such as stocks, shares or cryptocurrency. There are a few actions you can take to free up cash, if required, so you have the requisite cash reserves:
– Stop overpaying your mortgage now. If you’ve been paying extra every month or on an ad-hoc basis to reduce the term of your mortgage, bring your repayments back to the terms of the mortgage agreement. Use that extra cash to build up your savings.
– Don’t use cash reserves to make any sizeable purchases. If you absolutely need to
change your car, for example, take out the maximum loan over the longest period
and at the lowest interest rate instead.
– Delay making any unnecessary purchases using cash or credit until after the
mortgage process has been finalised.
You’ve prepared the groundwork: reduced your outgoings, built up your savings, but you’re still struggling to come up with the 20% deposit required as you are a non-first-time buyer. An example can help show the way.
Mark and Aisling plan to sell their two-bedroom apartment for €300,000 and buy a four-bedroom house for €400,000. Because they are second time buyers, they are limited to a loan amount of €320,000 (i.e. 80% LTV). They had €50,000 cash savings. However, they need to sell their existing apartment to fund the balance of the deposit. Their loan on the apartment is c.€200,000 so they should net c.€90,000 after selling expenses such as auctioneers and legal fees have been deducted. This process of selling one property and purchasing another simultaneously can be challenging so some people will firstly sell their existing property so that they have cash in the bank. Then, either move in with family or rent a property so that they are a stronger buyer for the house that they wish to trade up to and are not dependent on the sale of their existing property.
Central Bank Rules for Second-Time Buyers
In February 2015, the Central Bank introduced a range of measures for mortgages aimed at maintaining financial stability and protecting consumers. The measures set limits on the size of mortgages that consumers can borrow based on loan-to-value (LTV) and loan-to-income (LTI). Under LTI rules, a limit of 3.5 times gross income applies to all borrowers. First-time buyers can borrow up to 90% of property value. Second-time and subsequent buyers can borrow 80% of the property value only, which of course also applies to people looking to trade up.
If you’ve explored all avenues and still can’t come up with the 20% deposit, you may be able to avail of an exemption. There are two types of exemptions available, but lenders may grant an exemption under the loan to value rule or the loan to income rule, but not both.
I’ve found that most of the applications for exemptions to the Central Bank rules are from second-time buyers.
Loan to Value
Lenders can apply exemptions up to 20% of the total value of home loans that they grant to second and subsequent buyers. This means that it’s possible for second-time buyers to borrow up to 90% of the purchase price, reducing the deposit required to 10%. Under current rules, someone trading up to a house with a purchase price of €350,000 would require a deposit of €70,000, but just €35,000 if they got the exemption that meant the LTV increased to 90 per cent.
Loan to Income
Under loan-to-income exemptions, lenders can circumvent the 3.5 times gross income rule in 10% of second-time cases. It is possible to get the gross income multiple increased to four or even 5 times an applicant’s combined annual gross income (i.e. before tax).
Being granted an exemption of this kind can make a significant difference to the amount. you can borrow. For example, a couple with a combined income of €100,000 can borrow €350,000 under the rules. If they can get an LTI exemption, they can potentially borrow up to €500,000.
Take the example of Mary who previously owned an apartment with an ex-boyfriend. She wants to buy a house now. Despite saving hard for two years and keeping a clean credit and banking record, she’s 2% to 3% short of the 20% deposit.
An opportunity has come up to buy her dream house and at a great price, as the sellers are emigrating and are looking to sell quickly. Lenders tend to prefer applicants who have a particular property in mind and will complete the transaction in the short-term. With the assistance of a good broker, buyers like Mary who tick the right boxes may be able to secure an exemption from her bank under either the LTV or LTI rule.
Decisions are made on a case-by-case basis. Most lenders will require a minimum level of income; for example, a sole applicant will need an income of €40,000 or joint applicants will be earning at least €70,000, but this varies from bank to bank.
Remember, as stated earlier, you can apply either for a greater LTI multiple or a higher LTV, but not both.
Note: if you receive an exemption on the loan to income rule, allowing you to increase the amount you can borrow, you will need a bigger deposit.
It’s also worth noting that if the gap between what you need to borrow and what you can under the current rules is relatively small, e.g. €10,000 or so, it’s unlikely your bank will “give up” an exemption as it’s the whole loan that is classified as an exemption as opposed to just the amount of €10,000 over 3.5 times the income.
In conclusion, trading up can be more straightforward than people may think. With the right advice from an authorised mortgage broker, who will navigate you through this process, approval can be obtained even if your situation is not clear cut at the outset. There is some excellent value in properties at the moment so the best advice is to do the research and groundwork now and be ready to make your move when the time is right for you!