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The mortgage stress test: everything you need to know

Worried young married couple reading important notification from bank while managing domestic finances and calculating their expenses at kitchen table, using laptop computer and calculator

21 Aug 2017

Posted in:  First Time Buyer

Have you ever asked yourself the question, ‘What if?

We’re sure you have. When we are faced with an important decision, we automatically consider the risks involved before taking action. It’s an ancient survival instinct, which is good when you consider that risk vetting is a key ingredient to success.

Your mortgage is no exception, because we want to make sure there are no future financial hurdles that might trip you up.

To do this, we conduct a ‘mortgage stress test’. It’s a vetting process Mortgage Masters use to assess whether or not a person will be able to meet their payments down the line.

But what exactly does this entail, and how does this test change depending on your situation? Read on for everything you need to know.

Why conduct a stress test?

We have a look at your situation: income, spending habits, the lot. We then take your maximum possible mortgage repayment into account too. This ensures you’ll have enough money on a monthly basis to live comfortably after the mortgage has been paid.

Making sure that there will be a ‘comfort cushion’ for you to fall back on is a really important step in the process.

How do we conduct a stress test?

We ask for six to 12 months of bank statements to prove your ability to make payments. We’ll look at ‘discretionary’ spending or other expenses that aren’t a necessity. We identify your saving habits and outlay on rent and bills. Your ability to repay outstanding loans, and whether those loans will be paid back in full before the borrowed amount is agreed, is also assessed.

The Mortgage Master uses all of this to ‘test’ your future affordability and future ability (or inability) to repay your mortgage. An interest rate of 6 percent is used to test all variable rate mortgage amounts. In addition, the stress test checks to ensure that you can continue to meet payments if interest rates were to rise.

The stress test results will tell your Mortgage Master if there will be enough left in your bank account after all your expenses, and after your future mortgage repayments have been factored in.

The way the results are measured will change depending on your lifestyle situation. For example, a couple with children likely will have less disposable income than a person without kids.

Let’s look at a few examples.

These examples will show the minimum amount of disposable income EBS require the applicant to have left over after the stress test is conducted.

We have slightly different rules depending on your situation and lifestyle – however, the same test and rules apply to all mortgage amounts – big, small and in-between!

1. A couple with kids

A couple with one child must have €2,300 left in their bank account after all other expenses (like childcare, food, bills, etc.) have been deducted, and after their future mortgage repayments have been factored in.

Couples with more than one child will need an extra €250 for each thereafter.

2. All the single ladies (and men)

Single applicants need to have €1,400 left in their bank account after all other expenses and future mortgage repayments have been subtracted.

3. For people with dependants

Those with dependants should have an extra €250 per dependant on top of their disposable income.

So there you have it! The secrets of our stress test revealed.

Thinking of applying for a mortgage?

If you want to know more about deposits or applying for a mortgage, a 30 Minute Mortgage Meeting with an EBS Mortgage Master will set you straight.

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.

If you have any queries about opening an EBS savings account, call 1850 654 321 or email info@ebs.ie.

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

The content of this blog is expressed in broad terms and is limited to general information purposes only. Readers should always seek professional advice to address issues arising in specific contexts and not seek to rely on the information in this blog which does not constitute any form of advice or recommendation by EBS d.a.c.

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.

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