Affordability Formula

Emma36

Registered User
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Hello,
Can anyone advise how banks calculate affordability please? I know there are calculators to be found online but I'd like to understand the formula. I know they deduct the cost of the mortgage (stress tested with +2%) from the take home pay. What else do they deduct from take home pay and how much do they require to be left over as disposable? Many thanks, Emma
 
Hi Emma

I've copied & pasted an article I wrote about the process a while back. I hope it helps.

Planning to buy your first home is a big move. As well as the emotional side of deciding to become a home owner, there is a lot of paperwork and criteria to satisfy before a bank will give you a mortgage. This is my guide to help first time buyers guide to get a mortgage.

Deposit
You can borrow to 90% of first €220,000 of the purchase cost of the property. If the house is worth more than €220,000, you must have a 20% deposit for anything over that amount e.g. for a house worth €300,000 you need a €38,000 deposit. This is known as the Loan to Value (LTV). You will have to come up with the rest yourself. You also have to show them that you are able to pay the other transaction costs associated with a house purchase. Stamp duty is 1% of the house value up to €1m and solicitors fees will be up to €2,000. You also have to add surveyors fees of a few hundred.

Most lenders still allow people to be gifted the deposit but the giftor has to sign a declaration stating that they will not look for the money back.

Ability to make repayments
There are stories from The Celtic Tiger of people getting mortgages and not even being able to make the first repayment. That is the type of scenario that banks want to avoid so they want to make sure that you are able to meet your repayments. To do this, they stress test your ability to make the repayments. That is, they look at the rates available today and they add 2% to it. If you can show that you can meet these repayments, you have satisfied this criteria. So, how can you show a bank that you can meet these repayments:

  1. Savings – If you are still living at home, you have to show a regular pattern of savings at the level of monthly mortgage repayments.
  2. Rent – If you are renting, your monthly rent will be taken into consideration as obviously you will stop paying rental income when you start paying a mortgage.
  3. Discounting other loans and outgoings – show them that loans will be paid off before you draw down the mortgage. Loan repayments can seriously reduce the amount that a bank will lend you so it is a good idea to clear all other loans before applying for a mortgage.
Net Disposable Income
Even if you have shown the means to meet the repayments, you have to show that you have enough disposable income afterwards to live on. The amounts vary from lender to lender. One providers amounts are below.

  • Single Applicant €1,300 per month
  • Joint Applicants €2,050 per month
  • Additional for each child €250 per month
Regular Spending Patterns
Lenders want to give loans to people who are responsible with their money. They ask for 12 months current account and savings account statements. It really helps your application if you can show that you live within your means and save regularly every month.

Credit Cards & Overdrafts
You have to provide credit card statements for the last 12 months and your overdraft will be seen on your current account statements. Get rid of your overdraft altogether as this is seen as a loan and will reduce the amount you can get. Use your credit card sparingly and pay off the balance in full every month.

Mortgage applications are a lot more than filling out forms and submitting a load of paperwork. You have to sell yourself to the lenders and show them that you represent a low risk to them. It is essential that you package yourself in the right way and saving regularly is the best way to start.

Steven
www.bluewaterfp.ie
 
Exactly what I needed; thank you Steven. Do you know if short term debt is automatically viewed by a lender as a red flag, even if the applicant meets the disposable income criteria? Many thanks, Emma
 
It's not a red flag at all but it is taken into consideration when calculating the amount they will lend you. If you are within the Central Bank limits and the disposable income is ok, it shouldn't be an issue.


Steven
www.bluewaterfp.ie
 
Thanks very much. I am trying to establish a savings track record that will satisfy a lender and show I can afford a higher (and stress tested mortgage) but rather than using extra income to save or overpay existing mortgage, I am paying down short term debt. Hoping the lender will view this as evidence of capacity to repay. Thank you.
 
Hello, can I just hop in with a question here? I thought it was 6 months bank & savings statements that were required, not 12, can anyone confirm?
 
Hi Laura, I was told 6 months by EBS (last week) and same by AIB (6 months ago). Emma
 
Six months for all of the banks except for UB who require three months.

Three month and one month for credit cards respectively.
 
I note the advice above states that an Overdraft facility should be closed ideally. IS this true even if its is rarely used?

I have a 300E OD facility which i sometimes need as i typcially incur a lot of expenses with work and occasionally they can be delayed in reimbursement so i find the OD useful at times even for short periods.
 
rather than using extra income to save or overpay existing mortgage, I am paying down short term debt. Hoping the lender will view this as evidence of capacity to repay.

Yes, this will be included as evidence of repayment capacity, as long as the loan repayments are made in the assessment period (3-6 months, as mentioned above), and as long as the loan will not be continuing after the mortgage is drawn down. Repayment capacity is an important part of the application, but targets vary quite a bit from one lender to the next, and even then they are not absolute, and a reasonable amount of discretion can be applied.

I note the advice above states that an Overdraft facility should be closed ideally. IS this true even if its is rarely used?

As Gordon Gekko said, you don't have to close it. Occasional usage of an approved overdraft is fine, especially in circumstances like yours, but the less, the better.
 
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