Savings required for switching

[FredMac]

Hello ! I looked into switching our mortgage to KBC about this time last year and our application was rejected based on the stress test due to not having the required savings. All the other requirements were fine. At the moment due to covid and our current employment status we probably wouldn't be accepted by anyone but I want to set us up to be able to switch when things become more secure. What I need to know is what the banks are looking for in terms of savings and how best to set this up ...
Is it evidence of regular savings and should we set up a separate savings account and add to it monthly ?
Is there a certain amount we need to be saving regularly or would it be ok to set up with a lump sum and add to it ?
Is it a percentage of the mortgage amount or is it related to the repayment amount ?
If I'm setting up a separate account for savings would it be better to set it up with a bank to which we would potentially switch or keep it with our current bank ? Would a credit union account be ok ?
We're with BOI right now and have what I think is a decent enough interest rate of 2.9 % which I negotiated a few years ago as it was better than any switcher options but are coming to the end of that soon. We have c20 years and e200,000 left on a e300,000 morgage.

Any info would be greatly apreciated thank you !

 

[Dave Vanian]

There are two reasons that a lender looks for savings as part of a mortgage application.

(1) The deposit. Maximum mortgage for a switcher is 80% of the property value. If the value of your home was, say, €245,000 then the maximum 80% mortgage would be €196,000. If your Bank of Ireland mortgage is €200,000 then you'd need to put up the other €4,000 from your savings, plus switching costs.

(2) Affordability. Lenders will stress-test the proposed new mortgage to see how you would cope if interest rates went up a couple of percent. Use one of the free mortgage calculators online to see what the monthly repayment will be on your new mortgage. Then add 2 or 3% onto the interest rate and see what the repayment would be. That's doing your own stress-test. Assuming that the stress-tested repayment is higher than your current Bank of Ireland repayment, then you should be saving a minimum of the difference into a separate savings account. That way, you can show the new lender that you could afford the mortgage repayments even if interest rates rise by 2 or 3%.

It doesn't matter where you save. Just don't dip into the savings account between now and when you're applying for the new mortgage. Ideally keep a separate savings account, that shows money going into it only and not coming back out.

Reading your original post, I'd guess that (2) was the reason that KBC rejected your application.

 

[FredMac]

There are two reasons that a lender looks for savings as part of a mortgage application.

(1) The deposit. Maximum mortgage for a switcher is 80% of the property value. If the value of your home was, say, €245,000 then the maximum 80% mortgage would be €196,000. If your Bank of Ireland mortgage is €200,000 then you'd need to put up the other €4,000 from your savings, plus switching costs.

(2) Affordability. Lenders will stress-test the proposed new mortgage to see how you would cope if interest rates went up a couple of percent. Use one of the free mortgage calculators online to see what the monthly repayment will be on your new mortgage. Then add 2 or 3% onto the interest rate and see what the repayment would be. That's doing your own stress-test. Assuming that the stress-tested repayment is higher than your current Bank of Ireland repayment, then you should be saving a minimum of the difference into a separate savings account. That way, you can show the new lender that you could afford the mortgage repayments even if interest rates rise by 2 or 3%.

It doesn't matter where you save. Just don't dip into the savings account between now and when you're applying for the new mortgage. Ideally keep a separate savings account, that shows money going into it only and not coming back out.

Reading your original post, I'd guess that (2) was the reason that KBC rejected your application.

Thanks for the quick Reply ! That makes sense and gives me some figures to work on !