Commonly Asked Questions – Repayment Capacity
As one of Ireland’s top mortgage broker, we thought it would be nice to answer some commonly asked questions that we face from our clients and today we’ve picked a Repayment Capacity. Everyday people apply for a mortgage and yet many of them are turned down for something that they would pass with flying colours if they had been prepared.
When you are being considered for a mortgage, mortgage lenders take in account your finances and your repayment capacity. Not many people understand what Repayment Capacity actually is or how they can show they mortgage lenders they have a good repayment capacity.
What is a Repayment Capacity?
This is your ability to show that you can afford to repay your mortgage repayments comfortably. You need money to live and mortgage lenders need to know that you have enough money to live, and repay your mortgage without running into too much financial difficulty.
How Can I prove it?
A repayment capacity is normally taken over a period of 6 months. For each month, you need to prove that you are putting away a steady sum of money away from your current account between rent and savings which would be equal to or more than a monthly mortgage repayment.
Most banks and mortgage lenders don’t take into account your current account as it is constantly dipped into for this that and the other and it can be much harder to prove your repayments, not impossible but harder. For this reason we as an expert mortgage broker would suggest using your rent and savings to show these repayments. Not only is this easier to prove, but because it is separate from your current account, you’ll be less likely to dip into it in a moment of weakness.
How Can My Rent Be Used?
If you are renting a property, this in itself is proof that you can make monthly payments. However this needs to be proved, so it is wise to have it come from your bank account. If you can prove that your rent is being taken from your account for at least six consecutive months prior to applying for your mortgage, then you are well on your way to proving your repayment capacity.
If you are living at home rent free, then can be a little harder and you will need to save at least or equal to the monthly repayment of the mortgage you require. Again six consecutive monthly payments into a savings account is more than enough.
In order to prove your mortgage repayment capacity, you need to be saving equal to or greater than the mortgage monthly repayment. We would recommend a small bit greater than, not only does this show that you can afford the repayments comfortably, but it also shows that if you run into trouble, you’ll have a bit of breathing room with your savings before running into financial difficulty.
How It Works?
When you are considered for a mortgage, mortgage lenders need to see if the loan is viable and for this reason they stress test it. They divide the loan over the term you wish to apply for alongside your finances and test your repayment capacity. They normally test it over a period of six consecutive months. However the repayments they test for are 2% higher than normal mortgage repayments (4%) which means you are tested alongside a mortgage repayment of 6%.
This is to show that you can comfortably live in your new home and pay back your mortgage without running into financial difficulty. For this reason, we suggest to our clients to save a sum equal to or greater than this mortgage repayment of 6%, rather than the normal monthly repayment.
You might be thinking to yourself that’s simple and it can be. Unfortunately not many people are aware of this and fall short here. For example recently we had a client come in asking for advice on a mortgage; they were a doctor on an average salary of €106,000 a year looking to get a mortgage of around 300,000. Although they were financially more than capable of taking on such a loan, without proof of a mortgage repayment capacity, they were ineligible for a mortgage.
It’s not all doom and gloom if you can’t prove your mortgage repayment capacity now, because in six months time you can. As mortgage brokers, we would advise any person looking for a mortgage to see a mortgage broker 6 months previous to when they wish to apply.
The one thing we tell people is that while you may not be eligible for your mortgage now, you can be in six months with the proper advice and direction.
If you have any loans or credit cards, than getting a mortgage will be a little bit harder as the monthly payments will be taken off your qualifying income. However this can be used to your advantage, if you use the six months before applying for your mortgage to reduce or to clear your debts then this is another way to prove your repayment capacity.
Don’t expect favours from your bank or mortgage lender, they want to see a paper trail, without one it can be near impossible to get a mortgage. We know it can be hard to get a mortgage especially with the current economic crisis, but we at simplyinsure.ie want to help you the best way we can.
Remember if you have any question regarding what we covered in this blog, or anything else regarding your insurance or mortgage, we at simplyinsure.ie are always at hand to answer your questions and queries. Please do not hesitate to call us on (1890-746-759). Our website is also here to answer any of your questions and to give you a FREE quotation on your insurance should you need one. We also have a twitter and a facebook page that you can use to contact us, should you have any questions. –