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The first time buyer’s guide to repayment capacity

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10 Mar 2017

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‘Ah, you learn something new every day.’

You’ve been on the road to buying your own home a few months now, and this phrase has taken on a whole new meaning. In fact, you’re learning at least three new things a day – you never thought you’d be genuinely interested in the intricacies of fixing skirting boards or the difference between LTV and LTI!

However, an important mortgage topic which has caught your attention (or is bound to soon enough) is the term ‘repayment capacity’. Just in case you haven’t come across it, or you need some gentle reminding, here is the definition:

Repayment capacity is proof that a mortgage applicant can meet their future mortgage repayments. Not just any ‘ole mortgage repayments – the lending institution is also required to stress test the repayment to ensure the borrower can cope with future interest rate increases.

This little phrase is bound with a multitude of its own questions, such as ‘How much can I expect to repay each month?’ and ‘How am I assessed for my ability to meet future repayments?’

Luckily, we have the answers straight from the horse’s mouth, as mortgage advisor Alan Sweeney, who manages EBS Dundalk and EBS Navan, sheds some light on the topic.

1. How is repayment capacity calculated?

So first thing’s first – what’s the criteria for repayment capacity? What actions will help prove you can repay a mortgage? Alan reveals there are four main actions which will help show your repayment capacity:

  • Monthly savings. And we don’t mean bi-monthly, or savings which have been dipped into! We know it’s tough, but remember – dipping back into your savings means this amount will not count towards your repayment capacity.
  • Rent being paid and evidenced through a bank account (a paper trail for rent repayments is important).
  • The monthly repayment on an existing loan that will be finished before drawdown of the mortgage.
  • If living at home and handing up money to parents, then it is best to evidence this via bank account (similar to rent).

Basically, these actions create a paper trail of regular outgoings towards rent, an existing loan, or savings, which will prove to a mortgage advisor you can meet your future mortgage repayments when the time comes.

2. How much do I need to save to show my repayment capacity?

So you’ve been good as gold. You can tick off the list above with confidence – you have regular rent payments on your bank statements, and you’ve been saving like a savvy squirrel. However, there is another factor that will come into play – you need to be sure that these actions relate to a specific amount (namely, your future repayments).

So before you jump right in and start saving like there’s no tomorrow, you should sit down with your EBS mortgage advisor to work out exactly how much you can borrow, your loan term, and your future repayments.

Even falling short €50 a week will have a big impact on your repayment capacity, and ultimately, on your application.

And if your repayment capacity falls short of the amount you wish to borrow, you might be set back a few months (ouch).

3. What are the main pitfalls to avoid?

One of the biggest errors when saving for a mortgage is not keeping a paper-trail of your outgoings. So maybe you are making more than enough to meet future repayments, but this money is just not staying around in your account long enough to demonstrate your repayment capacity. Over to you, Alan...

“For example, if rent is being paid to a landlord but not through a bank account or visible by way of monthly withdrawals from a bank account, then this needs to be regularised for a 6-month period. The rent payment should be easily identifiable in the borrower's current account.”

Another reason is where people are "saving" a set amount each month.

Alan explains that “when we review the savings account, the ‘savings’ are being withdrawn regularly, and then essentially the account balance is not increasing. Try not to touch your savings for a 6-month period or longer if possible.”

4. What is the main advice you would give to an applicant who had poor repayment capacity?

For those of you who have had trouble with repayment capacity in the past, don’t give up hope. Here are four handy nuggets of advice Alan has for anyone who needs an action plan for getting mortgage ready:

  • Speak to an EBS Mortgage Advisor first and foremost!
  • Start saving regularly.
  • Pay rent/lodgings via your bank account so this payment is clearly evident.
  • If possible, try to pay down any short term debt you have (it is best to speak to an advisor first – this advice is on a case-by-case basis).

“There are numerous cases where people have come to me for a mortgage and they qualify based on incomes etc. but need to address the repayment capacity side of things.

We would run through what they need to do around their specific circumstances. In almost all cases, provided there are no major changes to the application, the mortgage will get approved when they come back to us having followed our recommendation for the 6-month period.”

5. Are there any trends you have noticed around repayment capacity in Ireland?

Alan sees a rise in the number of applicants who are aware and prepared when it comes to showing their repayment capacity. They have done their homework as it were, and this speeds up the process bigtime for the borrower and for the lender.

“People are becoming more aware of this requirement for their mortgage application and we as advisors love to see people coming into the office with the repayment capacity already in order. It means the customer has a much better chance of obtaining approval sooner rather than later.”

Are you thinking of buying your own home?

So there you have it – the ins and outs of how to prove your repayment capacity – one of the biggest factors of your mortgage application.

If you want to have an initial chat about your options, or if you’re ready for the application, the first step is to call into your local EBS office for a chat with one of our friendly mortgage advisors.

Find out how much you can afford to borrow with our mortgage calculator or book a mortgage meeting to suit you with one of our mortgage experts.

Don’t forget to visit our Facebook page for the latest home inspiration, news and great competitions.

Get the ball rolling with our First Time Buyer guide. You can also use our mortgage calculator to find out how much you may be able to borrow.

EBS d.a.c. neither accepts nor assumes any responsibility in relation to the contents of this blog and excludes all warranties, undertakings and representations (either express or implied) to the fullest extent permitted under applicable law.

EBS d.a.c. is regulated by the Central Bank of Ireland.

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