Get mortgage ready before you go anywhere near a bank

Buying a house has always been a challenge for young people. These days, it is a bigger challenge than it ever was.

When I started working (it was a while ago), the £12,000 sterling market rate for a terraced house in the north of England seemed unobtainable for a junior reporter earning less than half that sum. These days the chance to buy a property costing just over twice your salary would seem a bargain to be grasped, regardless of potential rude surprises.

Ireland’s Central Bank loosened its mortgage lending rules last year to allow first-time buyers to borrow up to four times their combined income. Certainly in Dublin, for all but a fraction of people, that still would not put them within shooting reach of a new home these days.

Irish property prices, we heard this week, are now almost 10 per cent ahead of their Celtic Tiger peak – a level seen even at the time as insanely out of touch with reality.

And rents in Ireland are running at record levels too. Daft.ie’s last report showed that the average rent in Dublin hit €2,395 a month in the three months to the end of March, up 2.5 per cent on the same period in 2023. You can pay over €2,000 a month for a one-bed apartment in some parts of the city.

In Cork, rents jumped 8 per cent to €1,870 a month while they were 17.5 per cent higher in Limerick at €1,933, 5 per cent up in Galway at €1,861 and almost 7 per cent stronger in Waterford on €1,495. Elsewhere in the State, monthly rents jumped on average by 6.8 per cent to €1,467.

Saving the deposit necessary for a home while paying your day-to-day bills is more difficult than ever. But the basic rules remain the same. And top of the list is planning your saving.

With first-time buyers generally required to pull together 10 per cent of the price, young couples will need to save at least €33,500 based on the median price of €335,000 for a home sold anywhere in the State in the 12 months to April last.

Median? That’s the sale price of the property precisely in the middle of all those bought in the period. It is seen as more accurate than an “average” which can be distorted by the sale of a smaller or higher number of properties at one extreme or the other pricewise.

If you are looking in Dublin over the same period, the median price was €448,750, meaning our first-time buyer is looking to put together a deposit of €44,875.

So here are a few steps you can take to get yourself mortgage-ready.

First, investigate the market. You might have a clear idea of where you would like to live, and whether that would be in a house or an apartment, but can you afford it? Look at estate agents in the area and get a sense of asking prices. Talk to them for some understanding on how those prices relate to the prices paid.

You should also check the Property Price Register on which all home sales are recorded, although there can be a lag time between a sale being agreed and when the details appear.

You’re not ready to buy just yet but, on recent evidence, you can assume prices will rise by mid to high single digit percentages every year. There is no point setting your sights on property that is clearly unrealistic. Apart from anything else, it can be dispiriting and buying a home is already tough enough. You may find you need to adjust your focus and make some compromises and you might as well do that from the outset.

As part of that exercise, assess realistically what you can afford to pay. This can be a little complex for people who receive irregular income, who are only recently returned home, who have changed jobs or whose income includes elements of bonus pay and the like.

Don’t be afraid to consult a mortgage broker to see what a bank will or will not consider in terms of how they assess your annual earnings and what evidence of those earnings will be required.

Simultaneously, start the savings habit. Some people are just naturally good at squirrelling away a portion of their weekly or monthly income for longer-term use – whether that’s a holiday, a big-ticket treat, or a mortgage deposit – but others are not and they need to find some savings discipline.

A wise senior colleague advised me many years ago to put aside any pay increase in a savings account immediately, before I got used to spending it. I’m not saying I followed this advice all the time but, even then, I recognised it as a smart.

If you are not a great saver, you especially need to spend time framing a weekly or monthly budget. Look at your monthly expenses and examine those spending habits. How much is essential and what is discretionary? In this tap and go age, it is all too easy to find yourself spending without thinking. That’s a habit you will need to lose.

Most of us think we spend wisely but when you investigate, you can almost always find areas where money can be saved. Switching utility providers, swapping brand name products for lesser but generally equivalent options, reining in entertainment spending a little, opting for a more modest holiday are just some of the areas where hard choices can be made tobuild more saving into our weekly or monthly routines.

And if you have pared down spending to the bone on your current income, you may also need to consider alternative or additional work over and above what you are doing right now. Sometimes the choices are easy; sometimes not. A budget will at least add discipline to your saving process.

But there is no use saving and then leaving that money idle. Savings can grow if you are active in where you put them, so choose your savings account with care. When it comes to a deposit, you are (hopefully) not looking very long term so things like unit fund investments are out, but it is equally silly to leave that money sitting in a demand deposit account earning next to nothing in interest.

Yet that is where almost 90 per cent of Irish savings are held.

Look at the options in the market offering better interest rates and take a pragmatic view of how long you can lock your money up for.

When it comes to making your money go further, it is important to look at options increasingly available to help first-time buyers especially get on the housing ladder.

These include Government-funded programmes such as the Help-to-Buy which will allow you claim back income tax and DIRT you have already paid over the past four years to help defray the cost of home purchase. You can claim back the lesser of €30,000 or 10 per cent of the value of the property you are buying, which could be a considerable help in getting you over the line.

Then there is the First Home Scheme which can provide up to 30 per cent of the price of a new home to certain buyers who have already maxed out their mortgage offer and are still short of the purchase price. In return, the State takes an equity share in the property which you can buy back over time as financial resources allow.

There is also the option of a local authority loan to bridge that mortgage gap depending on your income and the price of the property or the local authority affordable purchase scheme. Another option is the vacant property refurbishment grant.

All of these schemes have their own terms and conditions so you will need to read closely to see which, if any, you might qualify for. But where you do, they can make all the difference between owning a home and not being able to afford one.

One last option of financial assistance for those fortunate enough to have parents that can afford it is the bank of mum and dad. Parents are increasingly stepping in to offer children money to help bridge the gap between their borrowing capacity and the property price. It can operate as a loan or as a gift.

And while the latter will certainly impact what you may be able to receive tax-free down the line in inheritance, there is not much point in putting it off if your moment of greatest financial need is now.

Finally, remember that you are not tied down to just your own bank when in comes to a mortgage. Shop around. There are many different options out there both with the mainstream lenders and others such as Avant and the nonbank lenders like Finance Ireland, Dilosk’s ICS Mortgages, Nua Money and MoCo.

There are green rates for BER-friendly homes, fixed rates of varying length, interest rates depending on the loan to value and variable interest rates for those who may think that future European Central Bank cuts in interest rates might deliver better fixed options down the line.

A fixed rate offers the security of knowing precisely what you will need to pay each month, especially in the early years when finances are more likely to be tight for new homebuyers. But a poor fixed rate can lock you into an expensive loan so take the time to consider all options and, especially for anyone unsure of the process or with irregular income, consider using a mortgage broker for their expertise.

You can contact us at OnTheMoney@irishtimes.com with any personal finance questions you would like to see us address. Here is last week’s newsletter – on whether prize bonds are a better bet than the Lotto.