When it comes to getting mortgage approval, there are a lot of things to consider. It’s a confusing process full of figures and formulas, but there are 3 key numbers that matter the most. If you want a more comprehensive guide have a look at our first-time buyers guide.
If you can get your head around these numbers and what they mean, you’re well on your way to understanding how you can get approved. Here’s a rundown of what they are and why they are important.
Loan to Value (LTV)
Your loan to value ratio is a way to measure how much equity you have in your home, or, in plain English, what percentage of the house purchase is covered by the mortgage.
For example, let’s say you are buying a home for €100,000 and you have a deposit of €30,000. In this example, the mortgage covers €70,000 of the house value – giving you an LTV of 70%. In other words, you’re putting a 30% down payment on the house and the lender is covering the rest.
In this scenario, the mortgage loan is only 70% of the purchase price of the house, but if you don’t make your repayments, the lender can repossess the entire property – not just 70% of its value. This gives lenders a way to recover their money if you don’t meet your repayments.
It’s easy to see why lenders prefer a low LTV. Most require your LTV to be below 90% if you are a first-time buyer, or 80% otherwise.
Loan to Income (LTI)
Some of the limitations on lending come directly from the Central Bank. You can’t borrow more than 3.5 times your income, and all Irish lenders need to abide by this rule.
This means that if you have an income of €50,000, the maximum you can borrow is €175,000.
There isn’t a lot you can do to improve this figure. The only real way to increase it is by earning more money. Lenders can give an exception to this rule on a case by case basis, but they can only do this in a limited number of cases each year, and these usually run out fast. If you need an exception it’s better to apply earlier in the year before lenders use them up.
Ability to repay
Lenders need to see that you can repay your mortgage. They do this by checking your financial history to see how you spend your money. This typically means checking your bank statements and calculating your “ability to repay”, using a simple formula:
Ability to repay = Monthly Rent + Monthly Savings
In short, your monthly rent and your monthly savings need to be higher than your future mortgage repayments.
Below is a table giving a rough idea of how much your ability to repay needs to be depending on the size of the mortgage you need. For more precise figures, please contact us.
|Mortgage Amount||Monthly Ability to repay|
Bear in mind that lenders like to know that you can pay slightly more than your mortgage repayment, so these figures are a little higher than what you’ll actually pay.
It’s crucial that you maintain your ability to repay for 6 months to be eligible for mortgage approval, and this must be clearly visible on your bank statements. With rental prices at record highs, this might not be a problem for people who currently paying rent. But if you’re living with relatives instead, you need to make sure you put enough money towards your savings each month. Make sure you don’t miss a month - lenders always want consistency.
If you are looking for a fixed rate mortgage, the first thing you should think about is how long you would like to fix your mortgage for. It’s important that the length of this fixed period suits both your financial and personal circumstances.