The Money Doctor
Should I buy or rent my home?
How much can I borrow on my income?
Is it worth switching my mortgage to get a lower rate?
Help! I’m self-employed. How do I get a mortgage?
What will it cost for me to buy my home?
What tax relief will I receive on my home loan?
Does it make sense to buy a second property as an investment?
What are the benefits of owning a home in a designated area?
What’s the story with local authority loans?
What other State housing grants might be available to me?
Is it worth repaying my mortgage early?
What different sorts of home insurance will I need?
If I have trouble making my mortgage repayments what should I do?
Should I buy or rent my home?
Broadly speaking the cost of buying a home is the same as, or in many cases less than, renting the same property. This is linked to supply and demand, of course, and varies from region to region as well as from property to property. We are in a low-interest environment at the moment, and this favours house purchase, as does the availability of mortgage interest relief. If a future government was to introduce greater tenant rights the situation might change but, at the moment, if you can raise a sufficient deposit, buying makes better long-term sense. After all, when you give up a rental property you receive nothing back, whereas when you have paid off your mortgage you will own your home and may have seen a nice, tax-free capital gain as well.
How much can I borrow on my income?
You should always put down as much of a deposit as possible when buying your home. You will need a minimum of 8% of the purchase price (that is to say €24,000 if you are buying a €300,000 property) but it is preferable to have more. Why? Because it makes you less vulnerable to moves in interest rates and property values plus your financial adviser will be able to negotiate a lower interest rate with a lender if you have over 20% deposit.
Depending on your income, lenders will generally give you a mortgage of three and four-and-a-half times your income. For example:
If you are single and earn €60,000 a year you may be able to borrow up to €270,000 over 35 years.
If you and your partner earn a combined income of €80,000 you may be able to borrow between €300,000 and €350,000 over 35 years.
However, it is always worth remembering that interest rates may rise in the future and if possible you should try and avoid borrowing the maximum amount.
Note: if you are a young professional (e.g. barrister, dentist, accountant, etc.) borrowing money for the first time, you may be able to borrow 100% of the purchase price of your home with certain lenders.
Is it worth switching my mortgage to get a lower rate?
The short answer is: it depends! Many lenders offer all sorts of exciting inducements to new customers at the expense of their existing borrowers who get charged more. There are two things to consider:
• How much can you save by switching lender?
• What is switching lender going to cost you?
The first question is relatively easy to answer. The second question will depend on a variety of factors including:
• Whether you are on a fixed interest rate, in which case there may be a penalty for breaking the fixed rate contract; and
• How much, if anything, the new lender is going to charge you by way of legal and other costs. Some lenders even offer to pay the legal fees if you switch over to them.
If you can save 0.25% a year interest, or more, it could well be worth the switch. If in doubt, consult an adviser or accountant and ask them to do the figures for you.
Help! I’m self-employed. How do I get a mortgage?
Most financial institutions are pleased to lend to someone who is self-employed, though if you have less than three years’ worth of accounts it may be harder. This is another instance where a professional adviser will help. He or she will know which lenders are keen for your business and willing to offer you the lowest rates.
Note: it is no longer possible to get a mortgage in Ireland without a statement from your accountant to the effect that your tax affairs are completely up to date.
What will it cost for me to buy my home?
There are various expenses involved in buying a home:
• Survey fees — each lender has their own valuation panel and MUST obtain a report from the valuer on the property they wish to lend on
• Indemnity Bond — most lenders absorb this cost but some still charge their clients the cost of this bond. Once your loan is over 80% and under 92% of the purchase price, the lender takes out an insurance policy that in the event that they have to repossess, sell but do not recoup their loan fully, this policy will pay out the difference down to that 80%. Check with your lender/adviser for details of whether this is applicable to you
• Stamp duty on the property (see table on www.moneydoctor.ie)
• Legal fees generally 1% of price +VAT
• Outlay including
– Land registry fees
– Search fees
– Stamp duty on the mortgage
If you would like to know exactly what your mortgage repayments are going to cost, you can visit my web site — www.moneydoctor.ie — where you’ll find a calculator that will work it out for you.
To give you a typical example, for a first-time buyer purchasing a house for €200,000 with an 80% mortgage (€160,000) the total fees will be in the order of about €9,200, excluding indemnity bond and the deposit (20%).
What tax relief will I receive on my home loan?
You will be entitled to mortgage interest relief which will be given to you automatically and called ‘tax relief at source’ (TRS). See my web site for ‘Tax Credits and Allowances’ for specific details. There is something called bridging loan interest relief (a bridging loan is where you borrow money to buy a new home before you have vacated, but have a contract for sale signed on, your previous home) but, since it is almost impossible to obtain bridging finance in Ireland, this is largely irrelevant. Irish lenders have long stopped ‘open-ended bridging’ — this is where you buy a new home without having sold your existing home. Lenders will not take the risk of finding that you cannot sell your first home for whatever reason and be left with two major loans. Where you have a contract for sale signed together with a 10% deposit paid on your existing home, this is called ‘closed bridging’ and lenders can facilitate in these cases, knowing that it takes only a matter of weeks for the purchasers’ funds to come through to clear off the bridging facility.
Does it make sense to buy a second property as an investment?
Buying property and renting it out has become an increasingly popular investment over the last few years. There are various reasons for this including:
• Tax incentives. You can claim any loan interest you pay against any rental income you receive plus if you buy certain types of property or property in particular areas you will receive additional tax breaks;
• Rapid increases in property values;
• High yields in relation to other investments; and
• Low cost of borrowing money.
In general, the only investors who don’t make money from renting out property are those who have over-estimated the return they’ll receive, haven’t allowed for all the likely costs and lack the patience to wait out any market downturns. The secret to success is undoubtedly:
• Allow for periods without tenants (known as ‘voids’);
• Make sure you have calculated all the costs, including loan repayments, redecoration, maintenance, repair and property management costs; and
• Don’t view it as a short-term investment.
What are the benefits of owning a home in a designated area?
If you buy, build or restore a house in particular areas of the country, called designated areas, you are entitled to tax relief on part of the expense. This tax relief is quite generous and well worth claiming. See my web site for a detailed description of the various designated areas and the tax breaks applicable.
What’s the story with local authority loans?
County councils and city corporations both provide financial support to anyone on relatively low incomes so that they can afford to buy their own home. This support may come in the form of a mortgage or a mortgage subsidy. They may also buy a house with you on a ‘joint’ basis. To find out more contact your local authority.
What other State housing grants might be available to me?
There are various other grants available from the State including:
• Affordable housing. Many new developments now include a percentage of what is referred to as ‘affordable housing’. These are houses, flats or building sites which must be sold at well below market price to people who would not otherwise be able to afford to buy their own home;
• Improvement grants. A range of loans may be available from your local authority in very specific cases so that you can improve or extend your home in certain designated areas;
• Mortgage subsidy. If you are a local authority tenant and you give up your home to buy a property on the open market, you may be entitled to financial support for up to five years;
• Disabled persons grant. Given to cover the cost of adapting a private home for the needs of someone who is disabled; and
• Thatching grant. Available towards the cost of renewing or repairing thatched roofs on houses.
For more information about these grants contact your local authority or the Department of the Environment, Ballina, Co. Mayo on 1890 305030.
Is it worth repaying my mortgage early?
Should you over-pay your mortgage each month? Should you use all your available cash to reduce your mortgage? Should you use a lump sum of cash to reduce or pay off your mortgage? The answer is probably yes if the following applies to you:
• You don’t have any other, more expensive, debts. (If you do these should be paid off first);
• It won’t leave you without some savings tucked away against a rainy day; and
• There aren’t other investment opportunities which might be worth more to you in cash terms.
If you are thinking of paying off some or all of your mortgage I would strongly advise consulting an adviser first. He or she will be able to work out the figures for you.
What different sorts of home insurance will I need?
This is covered in greater detail in the chapter on insurance. In summary, homeowners should take out the following cover:
• Building insurance. This will be compulsory if you have a mortgage. Basically, it means that if some damage is done to the fabric of your home (by a fire or flood, for instance) then money is available to repair or rebuild as necessary;
• Contents insurance. This protects you against loss or damage of your home contents and may include ‘all risks’, e.g. your golf clubs left in the boot of your car; and
• Mortgage repayment insurance. This cover means that if you are ill, have an accident or are made redundant, your mortgage repayments would be paid for you. Payments usually last for up to a year after which you are on your own!
If I have trouble making my mortgage repayments what should I do?
You should immediately contact your lender. The worst thing you can do is keep them in the dark about any financial problems you may be encountering. If you need help with your finances you could contact:
• Your local St Vincent de Paul Society who run a special advice scheme.
• The Department of Social Welfare — who also run a free advice scheme called MABS (Money and Budgeting Advice Services). Details from your local Social Welfare Office or public library.
The Money Doctor says …
• Don’t be complacent. Even a small difference in the rate you pay can make a huge difference to the cost of your mortgage. No lender deserves your loyalty. Go to where the best deal is.
• Don’t trust any adviser who isn’t authorised to act for all the financial institutions offering home loans in Ireland. There are currently 13 lenders and anyone who can’t tell you about all of them isn’t going to get you the best deal.
• Remember, mortgage advisers are independent and you don’t have to pay for their services plus they can find you the best package for your needs.
• If in doubt seek expert help, especially when it comes to taking out home loan equity release loans for the over 65s.
'From The Money Doctor by John Lowe'
