Advice- second home with these figures

DarraghK1978

Registered User
Messages
13
Hello, I’m hoping to get some general advice before speaking to my bank or a broker, please.

Current home has a value of c. €420,000 and the mortgage is €250,000. Remaining term is 14 years and we switched to Ulster Bank last year on a 7 year fixed rate of 2.99%. Our monthly mortgage is €1,900.

Our combined income for 2019 was €206,000 (married couple- PAYE, €100k + €106k between basic salary and bonuses- basic salaries come to €182k, bonuses aren’t guaranteed, but consistently paid) and it should be a bit higher for 2020. Jobs are secure and both have long tenure. We’re both 41, no children and no plans to change this.

Net income is about €8,600 and we’re both contributing well towards pensions.
Currently have €100k in savings and putting €5k/month into this.

We’re hoping to buy a second house which will be our long-term family home. Our ultimate hope is to keep house 1 and rent it out. It should probably rent out for about €2,200 minimum (similar houses around range from €2,200-2,600) but obviously we’ll be taking a loss given the mortgage is €1,900 (and will increase if we move to BTL mortgage). However, the house is in an excellent location and we’d like to have the option of using it to help nieces and nephews in future if they decide to study or work in this city- but that’s a long way off and the property would be mortgage-free at that stage.

We’re looking at houses priced in the region of €750k so would need to have savings of €150k and a new mortgage of €600k on top of our existing €250k. So total mortgage of €800k on earnings of €185k basic/€206k total (3.9 - 4.4 times salary depending on whether bonuses are taken in to account).

My questions are-

Given our incomes and the fact that we don’t have dependents, do you think any banks are likely to give us approval for more than 3.5 times our income?

Will bonuses be counted in income calculation?

Am I right in thinking that, to rent house 1, we’d need to change to a BTL mortgage which seems to be on the region of 5% interest rate, given LTV?

How do I calculate the cost to rent out house 1 to factor in taxes etc?

Given that we’ve recently switched to Ulster Bank, do you think there’s much scope for negotiating with them if we were to take on a second mortgage with them?

Is there anything I’ve missed?

Wouldn’t be 100% against selling house 1 but would prefer to do it at a later date once we’ve agreed on house 2. Also, given Covid impact on house prices is unknown, I’d prefer not to be facing into a sale in the next while.
 
Forgot to add, also have shares that were worth about €50k up until recently, but have dropped about 30%. While I’m not currently adding anything to that pot, I’m not looking to cash out and see it as a long-term investment so it’s not included in my deposit calculations.
 
Hi there, I have been a reader of AAM for a while now but this is my first post. We were actually in a similar position with regards a second mortgage so I thought it might be useful to share our experience of the same.
I have a recent mortgage in my sole name (€210k, LTV 70%, €850 p/m) but my GF and I would like to get our own house together, for around €300k. Enough savings together to be below required 80% LTV and joint income €100k so inside 3.5x ceiling. Again house 1 is in a good location and rental market is strong approx €1,600-€2,000 p/m.
We enquired around different banks at the end of January (choosing to stay away from my current bank) and had no issue with receiving AIP even with keeping House 1.

To answer some of your questions:
1. I'm not sure how much of an impact Covid-19 will have on banks decision making now but you look to be OK affordability wise. €5k p/m in savings plus a mortgage of €1,900 p/m should show affordability even when current plus new payments are stressed by 2%. I actually don't think you need the 3.5 exemption but will explain in Q3.
2. Again depends on the banks appetite after the current situation but they were taking about 50% of non-guaranteed bonus averaged over last 3 years into income calculation.
3. No, my biggest advice would be to stay away from your current bank. Unless you notify them of the change they will not know House 1 is becoming your BTL. Your new bank won't be telling them. Obviously you will need to submit tax details to revenue every year but again this won't be passed back to your bank unless you claim TRS which is being phased out anyway. Also if you begin to rent it your mortgage statement will continue to go to House 1 unless you use AnPost redirect or your tenants send you on your post. Linked to question 1, the new mortgage is actually assessed separately. So your basic salary of €182k is well inside 3.5x ceiling needed for €600k mortgage. You mention you only have €100k in savings now so you may need to apply for 80% LTV exemption or use the €35k shares and wait 3 months to have the €150k needed.
4. Simple calculation would be rent of €2,200 p/m less interest on mortgage 1 at approx €600 p/m = €1,600 p/m. 50% of this would be paid in tax to revenue leaving net income of €1,400 p/m less upkeep and repairs (which could be used to lower tax paid). Mortgage 1 would have a shortfall of at least €6k per year. Based on your current position this is how much you would need to pay towards House 1 at a minimum each year. In Year 14 if rents were to stay at current levels you would be paying nearly €10k for House 1 but it would be mortgage free and you will have only needed to contribute approx €115k over 14 years.
5. As per Q3 I would steer clear of your current bank.
6. As pointed out the only thing I think you missed is the fact that mortgage 2 is assessed against the CBI rules independently of mortgage 1.

The Covid-19 situation may change things underwriting wise, there was another post from Brendan on Sunday morning which spoke about some banks no longer offering exemptions. It may be useful to have a chat with a broker or bank when things have calmed down to assess then. Brendan's Best Buy guide may help you with choosing a bank since you are with UB, KBC or AIB could be good choices if you don't need cash back offer. Again all the above is just my opinion/experience some of the more frequent posters may be able to give you some better insights.
 
My bank permitted the use of 50% of average bonus over three years.

I used the below as an estimation, which suggests that you would be in a net cash out position of 8k per year. This does not factor in that you are adding ~17k of value per year through the mortgage repayment, or does it factor in potential large one off costs. Overall your asset portfolio would grown 8k per year. This is a larger net cashflow outflow given the mortgage is over 14 years.

A 600k mortgage over 25 years @2.3% is 2,630 + ~700 (rental property cost per month) = 3,330 per month in baseline property costs. This is a significant increase in your monthly outgoings but given you are saving 5k per month you can afford it.

Once you have saved the 150k deposit, on paper you can afford to do the below, but there are simpler ways to go about it without the risk of being a landlord. If you sold the house you would need a substantially smaller mortgage in the new property (~430k instead of 600k). It would leave substantial free monthly cashflow to build retirement pot etc.

However, keeping the house is going to be less stress in the short-term when searching for a new house. You will not be in a chain, not have to worry about finding temporary accommodation etc. Also, you mention helping your nieces and nephews in the future, you can't really put a price on this.

In your situation, I would keep the house for the short-term and decide in a year whether to sell or not. I am in a similar position, owning an apartment with an expanding family, and plan to keep for an initial 5 years to build additional equity.

Apartment
Rental Income 26,400.002,200 * 12
Expenses 4,640.00Property Manager @ 10%, misc
Interest 7,475.00250000 * 0.0299
Taxable Income 14,285.00Income - ( Expenses + Interest)
Tax @ 52% 7,428.20
Mortgage Payments 22,800.00
Cashflow- 8,468.20Income - Expenses - Tax - Mortgage Payments


@Big Pud During the application to your new bank how was the existing mortgage treated? Did they do x3.5 salary minus existing mortgage?
 
@Big Pud During the application to your new bank how was the existing mortgage treated? Did they do x3.5 salary minus existing mortgage?

As far as I know the existing mortgage was not looked at for the 3.5 LTI limit. An exemption was never mentioned and our income figures which would be max €110k (including 50% non-guaranteed bonus) would not cover the existing and new mortgages combined (€450k) without one. We actually went to 2 banks and received AIP within a few days from both.
From the questions they asked about the existing mortgage and house I presume they did a calculation based off current mortgage amount and potential rental amount. In our situation rental amount should cover the existing mortgage even when stressed by 2% but I presume the bank also discount the rental amount in their analysis. Stressing both mortgage payments by 2% (or even 3%) and then combining still came in well short of demonstrated affordability, €2.5k savings p/m plus €850 existing mortgage p/m for us.

Assuming @DarraghK1978 is going to have 20 years as the term on the proposed mortgage, affordability would look something like:
No Rate Stress; Combined Mortgage - €5,250
2% Rate Stress; Combined Mortgage - €6,050
3% Rate Stress; Combined Mortgage - €6,500
From the figures given (€5k savings p/m and €1,900 existing mortgage p/m) this looks to be inside affordability even with no rent taken into consideration. A 25 year mortgage should make affordability calculation even more comfortable.
 
Last edited:
The big question is whether or not you should keep House 1.

You have an investment of €170k in it.

The return will be
€24,000 rent
Interest: €8k
Other expenses: €2k
Net return before tax: €14k
Net return after tax: €7k

If you sell it and borrow €170k less, you will save €5k in interest.

So if your tenants pay their rent and mind the property , you will be better off by €2k a year. If you are earning €100k each, this hassle is not worth it.

If you paid more than €420k for it, then any increase in value to the price you paid for it will be free of CGT.
If you paid less than €420k , there is no CGT if you sell it within the next year.

But overall, you are planning to have about €1.2m in property. That is too much. You should diversify.

You don't need to sell it immediately. So you might hold onto it until you have found and moved into your new home. And then sell it.

However, the house is in an excellent location and we’d like to have the option of using it to help nieces and nephews in future if they decide to study or work in this city- but that’s a long way off and the property would be mortgage-free at that stage.

You should not be holding onto the house for something which might happen in 14 years. Under current rules, it might be very difficult to get the tenants out to make way for your nieces and nephews. If you do want to provide for them, then buy a property at that stage.

Also, given Covid impact on house prices is unknown, I’d prefer not to be facing into a sale in the next while.

But if you are buying and selling at the same time, it should not matter.

Brendan
 
If I read this right, then monthly for two adults in employment:

Net income €8.6k
Savings €5k
Mortgage € 1.9k
Everything else €1.7k?
 
If I read this right, then monthly for two adults in employment:

Net income €8.6k
Savings €5k
Mortgage € 1.9k
Everything else €1.7k?

This is not the first time I have seen a very low monthly living allowance put down. I don't live extravagantly, but a few meals out a month, fill the car up, coffees, some nice produce, it quickly adds up. I now just take it at face value, rather than compare it to my own spending.
 
As far as I know the existing mortgage was not looked at for the 3.5 LTI limit. An exemption was never mentioned and our income figures which would be max €110k (including 50% non-guaranteed bonus) would not cover the existing and new mortgages combined (€450k) without one. We actually went to 2 banks and received AIP within a few days from both.

Is this a glitch in the matrix? I had assumed that even going to a new bank they would subtract my existing mortgage from the amount 3.5 multiple meaning that my total mortgage lending could not exceed 3.5 without an exemption. What you are saying is that they stress the existing mortgage as a BTL affordability then give you the mortgage based on normal requirements?

if my salary multiple is 500k and I have an existing mortgage of 200k, I can lend 400k providing I meet requirements, ending up with mortgages of 600k. So it is still possible to leverage in the market.
 
Is this a glitch in the matrix?
Not sure if it was intentional but looking at the CBI's website where they explain the mortgage measures here it includes links to the relevant regulations. The 2015 SI here which defined the 3.5 LTI limit doesn't look to take into account any existing mortgages or loans. The actual definition is; “high loan-to-income housing loan” means a housing loan advanced by a lender in respect of a residential property under which the total amount advanced is greater than a multiple of 3.5 times the borrower’s income. I can't see the definition being amended by the later SIs only the percentage of lending it applies, i.e. 20% of loans for a lender can be 3.5 LTI exempt was changed to 10% for non-FTBs in 2017.
I presume banks are interpreting the above as the "total amount advanced" by them "in respect of [that] residential property". I'm not sure if that is bending the rules or maybe what the CBI tried to implement to stop the regulation applying to accidental landlords. Also banks may not all have the same interpretation of the regulations and I presume their own underwriting and affordability criteria would stop someone amassing a property portfolio over a period of time by going to bank C, D, etc to buy house 3, 4 and so on.
 
Not sure if it was intentional but looking at the CBI's website where they explain the mortgage measures here it includes links to the relevant regulations. The 2015 SI here which defined the 3.5 LTI limit doesn't look to take into account any existing mortgages or loans. The actual definition is; “high loan-to-income housing loan” means a housing loan advanced by a lender in respect of a residential property under which the total amount advanced is greater than a multiple of 3.5 times the borrower’s income. I can't see the definition being amended by the later SIs only the percentage of lending it applies, i.e. 20% of loans for a lender can be 3.5 LTI exempt was changed to 10% for non-FTBs in 2017.
I presume banks are interpreting the above as the "total amount advanced" by them "in respect of [that] residential property". I'm not sure if that is bending the rules or maybe what the CBI tried to implement to stop the regulation applying to accidental landlords. Also banks may not all have the same interpretation of the regulations and I presume their own underwriting and affordability criteria would stop someone amassing a property portfolio over a period of time by going to bank C, D, etc to buy house 3, 4 and so on.

Thank you, that is useful to know
 
If I read this right, then monthly for two adults in employment:

Net income €8.6k
Savings €5k
Mortgage € 1.9k
Everything else €1.7k?

Yes. It can vary month on month but fairly fixed. We have no commuting costs at all, one car (fairly new hybrid bought outright), no loans outside of mortgage, not big drinkers (tend to prefer having a few decent bottles in stock at home), household bills aren’t excessive (we’re not home all that much). We both have health insurance, gym, and mobile phones paid by work. One has free meals in work, the other heavily subsidised. Tend to eat out a good bit alright.

Had a look at last month and roughly worked out as-
Life cover - 55 (probably need to up this but we both have PHI and death-in-service through work so it was on the long-finger)
Broadband/tv - 45 (was €95 but rang and got a reduction for a year)
Electric- 120 (bit higher than normal)
LPT- 50
Monthly medication- 40
Subscriptions (Netflix, charity, iCloud, Spotify) - 40
Groceries/supermarket- 300 max a month to include toiletries/household stuff etc (don’t eat at home a lot)

I’m sure I’ve forgotten loads but probably comes to no more than €800 on an average month, then the rest is ad-hoc spends like coffees, haircuts, meals out etc.

Car tax, car insurance, house insurance paid annually and not due until late in the year- that comes from saving.

Monthly savings will probably drop as we move into summer and start thinking of holidays (depending on restrictions etc)

Also, net income given is basic only and doesn’t include bonus. The whole (net) lot of that goes into savings so there’s a buffer for big irregular and annual expenses- insurances, new oven, home maintenance etc so the €5/month is probably more accurately described as €60-65k a year, once you take bonus into account, so monthly spends probably range from €1,500 - €2,200 without impacting on savings too much.

Do people really spend much more than that? I know it’s a how long is a piece of string question but I would have considered our living costs quite high at c. €3.8k a month (mortgage + bills + household expenses). €3.8k take home works at at roughly the equivalent of a married couple with two children where one parent staying home, and the other earning c. €60k.
 
Right, back to the topic at hand.

Thanks for the replies everyone, most useful.

I rang Ulster Bank today. The reason is that I wanted to see if they would be more willing to look at exceptions (to either the deposit percentage, or salary multiplier) given I’ve recently become a customer. Short answer is no- it looks like they won’t be applying any exceptions for the rest of this year.

However, I was surprised that they were able to give me rough quote based on what I outlined in my first post. As in @BIG Pud’s experience, existing mortgage was not taken into account so I wouldn’t need an exemption to the salary multiplier rule- I can borrow up to 3.5 times income with the bonuses taken into account at 50% based on 3-year average. I was quite surprised at this as I had been anticipating that the existing mortgage would have been taken into account.

Next steps are to speak to other banks and may look at applying in the next few months based on a €600k mortgage. Will need to get the deposit up by about €60k if we are planning on a house at about €750k. Could do that in about 4 months if I also used my shares to show amount on deposit, if required, plus bonuses are due to be paid in April and June.

We’re not in a particular rush but it would be nice to have approvals in place so that if something that ticked 100% of our boxes did go up on the market, we’d be in a position to bid.

It will be interesting to see what impact Coronavirus has over the next 3-6 months and beyond.
 
@DarraghK1978

That's interesting, thanks. Your day-to-day spending just appeared very low as a share of your net income, never mind gross.

I haven't crunched the numbers in detail on your proposal. To my eye you seem to be able to generate an awful lot of saving from surplus income. You're not fully reliant on leverage to support this plan.

Why not keep doing saving for 3 years? See where you are then, and if it still makes sense as a business plan. At that point you'll be ~=€150k to the good, and won't need to look for any mortgage exemptions.

On house 1 check if your contract obliges you to inform bank of change of use to rental and whether they reserve the right to put you on a BTL rate. If so, and if you take out mortgage 2 with a different provider, then it all hinges on you voluntarily calling them up to tell them about a change of use.
 
@DarraghK1978 This puts you in a great position, you have no time pressure to find the perfect house. It can be assumed that the housing market will effectively shut for the next 3 months, so continue to save. In the meantime have a look at on myhome / daft at properties in the preferred area, and get an understanding of what 700k will get you.

@NoRegretsCoyote what can happen if you don't voluntarily tell bank 1 it is not a BTL?
 
Incidentally, on the phone yesterday UB were quite vague about changing house 1 to a BTL rate.

I’m working off the basis that they will. Their fixed rates are very good at the moment but probably not to the extent that they’d off-set a penalty and c. 2% interest increase for house 1 so mortgage for house 2 with a different bank is probably the way to go if I’m not selling it straight away.
 
Back
Top