Previous versions of HBWI carried a large section on the process of applying for a mortgage as banks offered mortgages with historic ease of access. The market has changed beyond recognition. At the time of writing:-
- Few new mortgages are available from banks
- Levels of mortgage arrears and mortgage-related bad debts are at unprecedented levels
- Levels of house repossession are at an historic high level, but are lower than might be expected in another economy with similar characteristics
- Many account-holders who are not in arrears are believed to be experiencing difficulty in sustaining that position
- Banks are restrained by a variety of factors from adopting more aggressive tactics in relation to mortgage arrears. The factors include public and political pressure, weakness of banks bargaining position following bailouts, a weak market for repossessed properties, etc.
Ireland has a very high level of home ownership by occupiers. Over the past 50 years and more, home ownership has been an excellent, tax efficient investment, but house prices have reduced considerably after a peak in 2007, and have typically dropped by c.50%.
What are mortgages?
A mortgage is a loan in which a house or other property is used as collateral.
A wide range of providers have provided mortgages in Ireland, including the major retail banks, building societies, and others. Although some banks claim that they are offering mortgages at the moment, it appears that potential purchasers sometimes find difficulty in getting a mortgage to suit their requirements
There are several variations of mortgages, and although some are not currently offered, the residue of mortgages offered in the past still exists.
- Home mortgages are used to purchase the primary residence of the borrower. Typically, these mortgages have a duration in excess of 20 years, and are paid by monthly instalments comprising interest and capital elements.
- Commercial mortgages are used to purchase investment property other than the primary residence of the occupier. The property may be residential property which may be rented to tenants, or non-residential property for commercial use. Examples of non-residential property include agricultural land, building land, commercial premises.
- Endowment mortgages. Endowment mortgages were popular some years ago, but are no longer offered. In an endowment mortgage, the borrower pays into an endowment insurance policy, and the capital amount of the mortgage is repaid by the insurance policy. In many cases, the insurance policy did not yield sufficient to repay the capital, and the borrower had to make further arrangements.
- Equity release mortgages. Where one owns a property in full, or has a low mortgage, then one can borrow for other purposes, using the property as collateral. The nature and terms of the mortgage may be similar to any of the above. The interest rate will normally be higher.
- A number of mortgage instruments targeted at senior citizens have been developed. Some of these allowed for borrowing which is fully paid out of the proceeds of the estate on the death of the mortagee.
There are variations on the mechanism for setting interest rates:-
- Fixed rate mortgages have an agreed interest rate for a specified period, and there is usually an option to renew the rate agreement at the end of the fixed period.
- Variable rate mortgages may have interest rates which are set by the lender from time to time, or may have interest rates which are set by reference to an external rate - either a rate defined by a statutory authority (e.g. ECB rate) or a rate defined by the market (e.g. Euribor 3-month rate)
There are variations on the repayment mechanism.
- Constant repayments - The repayments are calculated using an annuity formula such that if rates remain constant, the loan would be repaid in full by the specified date. The repayment includes interest and capital, such that in the early part of the loan, the interest element is substantial, but the interest element declines and the capital element increases as time progresses. When rates change, the annuity formula is re-run to calculate new repayments.
- Interest-only repayments - The repayments are sufficient to pay interest only. Separate arrangements must be made for repayment of the capital.
Applying for a mortgage when buying a property
In the present market conditions, banks have limited capacity and/or willingness to grant mortgages. As a result, the experience of applicants to different mortgage lenders may differ widely.
- You can apply for a mortgage approval in principle before you select a particular property to purchase. This will give you comfort and assurance in regard to the attitude which the financial institution will adopt when you actually settle on a property. While the approval in principle is not normally a formal commitment, it is seldom revoked. When you have selected your property to purchase, you should then formalise the application.
- If you want to bid at an auction, you will normally have to have a formal mortgage offer before bidding - as an accepted auction bid is a commitment to purchase. So you must fulfil the requirements of the financial institution, and arrange that they survey the property.
- If you want to purchase by private treaty, you can normally reserve the property by placing a deposit. You will then be granted a short period in which to obtain formal approval. Note that the placing of a deposit is not a firm contract. The seller or the purchaser may pull out of the deal up to the date of the contract.
Obtaining a mortgage
The purchase of a house and the associated mortgage agreement are among the largest transactions in the lifetime of most borrowers. It must be undertaken with great care.
In the past, the major determinant of the size of mortgage you could obtain was the property you were purchasing. Up to 100% mortgages were commonplace. Nowadays, the characteristics of the applicant are much more important, as house prices have been seen to be more volatile. In practice, you now need to have an impeccable banking record and a thoroughly reliable source of income. You are unlikely to have many options, and will find that the workload of placing applications with more than one provider is onerous. So you must choose where you are most likely to succeed.
If/when you get a mortgage offer, then many of the terms will be set by the bank and your capability to negotiate terms will be limited.
It is also important to remember that most mortgages are not for life.
Interest rates and APR (Annual Percentage Rate of Charge)
Interest calculations and APR calculations are covered separately in this site here.
The APR is the layman's guide to complex interest calculations. There is no standard way of calculating interest - 5% interest from one institution may be different from 5% interest from another. The APR is a standardised calculation laid down in detail in legislation, and taking into account both interest and other relevant costs.
Reviewing and Switching mortgages
Through the life of the mortgage, your circumstances will change. Also, the nature of the mortgage will change. At the outset, you may be borrowing up to your limit, and be considered as a high risk. Additionally, you may be borrowing a very high percentage of the value of the property.
As time progresses, your income may increase, and the value of your house may increase if present trends continue. So the mortgage is a lower multiple of your income, and the loan is a lower percentage of the value of the premises (LTV or Loan-to-Value Ratio). It is then worthwhile to review your mortgage, to talk with your mortgage company, and if worthwhile, to switch mortgages – but this will only be possible if/when mortgage conditions return to normal.
Mortgage Protection Insurance
Many people wonder why a bank wants mortgage protection insurance as well as the security of the house as collateral. If a financial institution lends to 1000 customers over 30 years, they can be sure that a significant portion of those will die with funds outstanding. Financial institutions lend money; they want to be repaid in money. They do not want to have to foreclose on a mortgage and sell a house to get their money back. And they do not want to take away the inheritance from the partner, children, or other beneficiaries. So they insist that the borrower is insured. And this usually applies whether the borrower has dependents or not.
Mortgage protection insurance is life assurance especially designed so that the amount paid out on death matches the amount of the mortgage outstanding. Most life insurance companies offer mortgage protection. Most financial institutions act as agents for one or more life insurance company, and may offer mortgage protection insurance - but you are nevertheless entitled to choose your mortgage protection vendor. Our advice:- shop around.
The financial institution will take a lien in the mortgage protection insurance. This has two effects (1) they will be notified if the policy lapses e.g. if the premiums are not paid and (2) in the event of your death, the proceeds will be paid directly to the financial institution.
If the premises and the mortgage are in joint names, then the mortgage protection insurance should normally be in joint names, and payable in full on the first death.
The financial institution will insist on fire insurance - in fact, they will normally insist on comprehensive insurance which also covers storm damage, flood damage, etc. Most financial institutions act as agents for one or more fire insurance company, and may offer fire insurance - but you are nevertheless normally entitled to choose your fire insurance vendor. Our advice:- shop around.
The financial institution will take a lien in the fire insurance. This has two effects (1) they will be notified if the policy lapses e.g. if the premiums are not paid and (2) in the event of major fire, the proceeds may be paid directly to the financial institution.
The financial institution will insist that fire insurance is regularly revised to reflect current insurable value of the house. It is not sufficient to ensure that the fire insurance just covers the amount of the mortgage. If you are underinsured, the "average" clause in your insurance will apply, and may considerably reduce the payout.
Payment protection insurance
Payment protection insurance is an insurance which will pay your mortgage repayments for a period in the event of specified events. These events may include loss of job, sickness, etc. Such insurance is usually expensive, and the amounts paid out are frequently small. You should be aware, for example, that some policies consider that if you accept a "voluntary redundancy" package from an ailing company, you cannot make a claim for loss of job. Our advice:- consider carefully before you sign.
Breach of Mortgage Terms
If you breach the terms of your mortgage, then you run the risk that the financial institution will foreclose on the mortgage. Typical breaches include:-
- Failure to make agreed repayments
- Failure to ensure continuous mortgage protection insurance
- Failure to ensure fire insurance cover
Your mortgage deed will show the consequences of such breach, which will invariably include a right on the part of the financial institution to foreclose on the mortgage and take possession of the property. In reality, financial institutions are reluctant to proceed to foreclosure and will provide opportunity to negotiate a reasonable solution. Our advice:- negotiate. If negotiation fails, consult your lawyer.
If you fail to meet your obligations on a mortgage, you may be listed on the Irish Credit Bureau. You will then have difficulty borrowing in the future.