Homebuyers desperate to get on the housing ladder are being refused mortgages because they do not fit the mould defined by lenders.
These “mortgage misfits” cannot get the loan they need to buy their dream home because banks believe that lending to them is too risky. This is despite the fact that many of those being rejected have strong earnings potential and may even be in permanent secure jobs.
Mortgage brokers say that they constantly encounter borrowers, such as self-employed workers or older people, who are frustrated at being denied a mortgage because of the strict lending criteria set out by banks. Stephen Hughes, director of Irish Mortgage Brokers, said: “I take phone calls every week from disgruntled self employed people who feel they are being unfairly treated when it comes to applying for a mortgage. They are at a huge disadvantage compared with PAYE workers.”
Here’s how to tell if you if you’re one of Ireland’s mortgage misfits.
YOU’RE NEWLY SELF-EMPLOYED
Self-employed workers need to show several years’ earnings to get a mortgage, while PAYE workers need only to show their past six months’ wage slips.
“If you’re self-employed you will need at least two years’ tax returns and two years’ certified accounts before banks will even consider lending to you,” said Hughes.“That’s the minimum ask—some lenders will want three years’ figures.”
The requirement to have at least two years of financial statements means that any people who have recently become self-employed, even if they are currently earning a good income, will not get a mortgage. “If you started a new company in January 2016 then I would say there really isn’t any chance a bank lending to you,” said Hughes
Even newly self-employed workers able to show three years’ accounts can find themselves stymied in how much they can borrow, because banks base the mortgage on their average annual income, which may not reflect their current earnings. Michael Dowling, chairman of the Irish Brokers’ Association mortgage committee, said: “There are a lot of set-up costs with starting a business, which have an impact your ability to generate income in year one.
“So if you break even in year one, make €20,000 in year two,and make €40,000 in year three, your mortgage is based on average income across the three years, which is €20,000.”
Self-employed workers refused a mortgage from the main stream banks may have a better chance by applying to the niche lender Pepper Homeloans, which Dowling said was “a bit more flexible”. “Pepper will still want two years’figures but it will take a more benign view of your average earnings, and give more credence to current year income,” he said. Pepper’s mortgage rates, however, are higher than those of mainstream lenders and it is also the only lender to charge an arrangement fee of 0.5% of your mortgage, up to a maximum of €1,800.
YOU HAVE BAD CREDIT
Banks use your credit rating as a tool when deciding to approve a mortgage,so you will struggle to get a mortgage if you have a bad credit history. It takes five years from the time a loan is repaid to clear off your credit record, and lenders will often refuse credit even if your debt problem was temporary.
“If it was a minor blip and there was a good reason for it, you might be OK. But if you missed payments on a mortgage, have a revoked credit card or an unpaid student loan, then the mainstream lenders won’t consider you,” said Hughes.
Again, these mortgage misfits may have better luck applying to Pepper, which targets borrowers denied by mainstream lenders. Garry Manning of the broker Omac Mortgages and Finance in
Dublin said: “Pepper is a bit more lenient. So if you had two missed payments on a secured loan, with no current arrears, it would consider you. With an unsecured loan, you can’t have more than six missed payments, with no current arrears.”
It costs €6 to request a copy of your credit rating from the Irish Credit Bureau, which manages credit reports in Ireland. If you spot a mistake, you should request an amendment.
YOU’RE OVER 40
The longer you leave it after turning 40,the harder you will find it to get a mortgage.
In general, owner-occupier mortgages are available for a maximum term of 35 years, with banks insisting you have your loan paid off by between 65 and 70, depending on the lender.
Bank of Ireland and Permanent TSB give borrowers up to the age of 70 to pay off the loan. KBC will give you until you are 68, while AIB requires that your mortgage is cleared before turning 66.
“This is starting to become a bit of an issue,” said Manning. “I’m coming across many more borrowers having difficulty in getting the mortgage they want because of their age.”
Another problem Manning highlighted was that, even though the retirement age goes up to 68 in 2028, some lenders will lend only up to 66.
Older borrowers are also curtailed in the size of their mortgage. For example, if you wait until you are 45, the maximum mortgage term is 20 years with some lenders, which pushes up your repayments and limits what you are able to borrow. Those in their late fifties or early sixties may not qualify at all.
“If you’re over 60, it’s virtually impossible to get a loan,” said Dowling. “The problem is, when the loan is stress-tested over such a short term, the repayments are so high that, unless you’ve got a very substantial income, you won’t pass the stress test criteria.”
YOU’RE PAID IN A FOREIGN CURRENCY
Some banks won’t lend to you if your earnings come from outside of Ireland. This includes people living in the border region who work in Northern Ireland, but live in the Republic.
Harry Dwyer of Moneycare Mortgages & Investments, a broker in Monaghan, said: “Several banks won’t lend on the basis of sterling income and, even if they do, some will count only 80% of earnings.”
According to Dwyer, Haven Mortgages and Ulster Bank will lend to border town workers earning in sterling but PTSB and KBC will not.
“You could have the strange situation of someone who works as an accountant in Northern Ireland and lives 10 minutes away in the Republic but won’t qualify for a mortgage in their home town,” he said.
Irish residents living abroad who want to buy in Ireland also face restrictions. “Bank of Ireland will only lend if you earn your income in sterling, US dollars or Australian dollars,” said Dowling. “AIB will consider a mortgage but there are certain countries it won’t lend from.”
YOU HAVE YOUNG CHILDREN
Having children can turn you into a mortgage misfit by curtailing how much you can borrow. “Banks reduce your net disposable income by €250 a month per child when calculating what you can afford. If you’re also paying childcare costs, the amount you can borrow is hammered,” said Hughes. Dowling said: “Having two children reduces what you can borrow by anything from €20,000 to €30,000.”