Analysis: Applying for a mortgage may appear daunting so what do you need to know about what the bank want to know?
Getting the keys to your new home is a memorable milestone, but it begins for most with the often-daunting process of applying for a mortgage. This journey is rarely straightforward and can induce financial anxiety due to the extensive documentation and bureaucracy involved.
While these layers may seem excessive, they reflect the lender’s need to assess the significant risk of granting a sizeable loan that typically spans more than 25 years. The longer the time horizon is for the lender, the greater the risk. Furthermore, the mortgage market is tightly regulated in the aftermath of the 2008 global financial crisis.
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From RTÉ Radio 1’s Today with Claire Byrne, Margaret Barrett from Mortgage Navigators on what you need to know about applying for a mortgage
The term ‘mortgage’ originates from Old French, with ‘mort’ meaning death and ‘gage’ meaning pledge. Essentially, a mortgage concludes (or “dies”) when the debt is repaid or the borrower defaults. To improve your chances of approval, it’s vital to approach the application with the lender’s perspective in mind. Here are some frequently asked questions about the process.
What are the key factors in deciding my application?
The primary factor is your ability to repay the loan, which lenders evaluate using criteria such as salary, credit history, savings history, number of dependents and deposit amount. Typically, lenders assess a track record of prudent financial behaviour over a minimum six-month period. This period is a minimum, and practicing healthy financial management in general is recommended. These statements will be requested from all accounts. The bank will use statements to assess your overall behaviour and assess risks.
Your requested mortgage amount is then weighed against Central Bank borrowing thresholds. Simulations of economic shocks – like a 2% rise in interest rates, increased living costs or reduced income – are applied to ensure you can still meet repayments under adverse conditions. Generally, total debt should not exceed 35% of your income, as this will significantly impact your ability to repay.
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Should I apply in-person?
Banks often use computerised models to perform an initial assessment of your finances. While these systems streamline applications, they can result in seemingly arbitrary refusals, where subjective considerations are limited.
For a more tailored evaluation, consider applying in person, especially during the preliminary phases. A mortgage advisor can account for atypical financial situations that might otherwise be overlooked by automated systems. Banks have also made in-person application easier in recent years with mobile advisors.
I don’t have a permanent job contract so can I still apply?
Banks typically view non-permanent employment as a risk, often rejecting applications from individuals in probationary periods or on temporary contracts. However, engaging with a mortgage advisor or broker can improve your chances.
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Certain professions with rolling contracts may be looked upon more favourably, particularly if the contracts have been renewed multiple times. Clear communication about your employment circumstances is key.
What should I avoid when applying for a mortgage?
When applying for a mortgage, certain behaviours and financial activities can serve as red flags for lenders, often resulting in automatic refusals. While many of these issues are straightforward, others are more nuanced and require attention.
To begin with, it is advisable to obtain a report from the central credit register to review your borrowings. This document will highlight any missed payments and list all active loans. If discrepancies are found, you should address them promptly to ensure your credit report reflects borrowings in good standing.
During the mortgage application process, it is advisable to avoid taking on any new borrowings. The credit register tracks loans of €500 or more, including buy-now-pay-later arrangements, so practicing prudent financial management, such as saving for necessary purchases, is essential. Draining your savings should also be avoided as it signals poor financial habits. The occasional splurge is acceptable but should not compromise your ability to maintain strong savings.
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Using an overdraft is another practice to avoid. Eliminating overdraft facilities, if possible, helps remove the temptation to overspend. Timely repayment of all loans, credit card bills, and other financial obligations is critical, as late payment charges could negatively impact your application. Additionally, rent payments should be made through your bank account with clear references. Cash payments for rent are generally viewed unfavourably by lenders.
Your tax affairs should also be in order with Revenue. While it has not been flagged as a major concern to date, the ease of personal trading has led many to invest spare cash, particularly in cryptocurrency. If you invest regularly without a broker, you should investigate your tax liability on any gains with the Revenue.
Some financial transactions, though less obvious, may also affect your application. A common misconception is that any gambling transaction results in automatic rejection. While modest and infrequent gambling, particularly around major events like the Grand National or the World Cup, may be overlooked, a consistent pattern of gambling throughout the year raises concerns.
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Similarly, frequent money transfers to friends or family should be labelled with clear and professional descriptions to avoid confusion or suspicion. Humorous or inappropriate transaction names, particularly those implying illicit activities, should be avoided (no matter how hilarious or benign they may seem at the time). Recently, transactions on adult content platforms have also drawn scrutiny from lenders and are best avoided entirely.
Will a holiday or new car affect my application?
Lenders assess whether your holiday expenses align with your ability to repay the mortgage. A modest trip funded through discretionary spending is acceptable, but avoid splurging on extravagant vacations financed by savings or loans. A lender is not withholding your passport, but will expect you to be prudent.
It is recommended not to purchase a new car during the mortgage process. This is a significant undertaking of new debt and will be considered to affect your ability to repay. If you absolutely need a new car, you should communicate with your lender or broker to determine how this might affect your application.
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Does being single affect my application?
No. Your ability to repay will be assessed similar to any other application. The only impediment which affects a single person should be the central bank borrowing limits.
Do banks lend to self-employed people?
If you are self-employed, you must ensure to have three years of clear financial statements and records. Be sure to have separate personal and business accounts and never mix them. You will then be assessed as any other application. If you have less than three years of statements, you can discuss with your advisor or broker, and they will assist with your individual case.
Should I shop around?
Yes. Contrary to popular belief, having your current account with a lender is not mandatory and may result in higher costs over time. Shopping around can help you secure lower interest rates and favourable terms.
If the process feels overwhelming, consider engaging a qualified mortgage broker. They can apply to multiple lenders on your behalf and are typically compensated by the lender, not the borrower. Shopping around is particularly advantageous if seeking an exemption from Central Bank rules, as different providers offer exemptions at varying times of the year.
You will need to notify the bank if you have a change of circumstances during the application process
What else should I consider?
You will need to notify the bank if you have a change of circumstances during the application process. A number of circumstance changes can affect the banks judgement of your ability to repay. Principally, you should avoid changing jobs during the process. As the probationary period may lead to an approval being rescinded. You will also need to notify the bank if your employment status has changed for any other reason.
In addition, you will need to notify the bank on the arrival of any dependents, as the bank will assume extra costs for their support. This notification should be provided to the bank soon after the event. It is also possible to get a mortgage while on maternity leave, but it is critical to communicate with the lender regarding timelines of return to work, as full salary is preferred to maternity pay.
Once approved, can I spend some of my savings?
Once you have your approval in principle, it is important to remember that the lender assumes your financial behaviour will continue to be prudent. They will additionally request updated statements prior to drawdown on the mortgage. If behaviour deteriorates or you spend all your savings, the approval will be withdrawn.
If you have unexpected costs and have to draw on your savings, communicate this with the lender. The bank understands that there are unexpected financial burdens, and upfront communication can determine what, if any, impact this will have on your application.
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The views expressed here are those of the author and do not represent or reflect the views of RTÉ
