Not many people can afford to buy a property using cash. More often than not, you will need to take out a Mortgage Loan in order to finance the purchase of a property.
In this article we look at some very basic types of Mortgage Loans available in Ireland. You will learn basic Mortgage terminology (such as LTV) and rules.
First Time vs Second Time buyers
The first important distinction is whether you are a First Time or a Second Time buyer.
First Time buyers are entitled to apply for a Mortgage Loan of up to 90% the value of the property. The proportion of loan to value is often abbreviated as LTV. Let's take the following example:
Price of property = €250,000
LTV = 90%
Maximum Loan Amount = €225,000
From the above example we can see that the maximum amount of loan that we would be allowed to borrow from the bank is €225,000 and the rest has to come from savings.
Second Time buyers can only finance 80% of the value of the property using a loan. The rest must come from the buyer's savings.
If we reuse the above example, it gives us:
Price of property = €250,000
LTV = 80%
Maximum Loan Amount = €200,000
As you can see, Second Time buyers require a lot more savings to be able to purchase a second property.
Sole or joint application
You can apply for a mortgage by yourself or join forces with another person in order to build the necessary savings to be entitled to get a mortgage. You can apply with your partner, a family member or a trusted friend. But remember, always consult a solicitor to better understand the legal implications of a joint mortgage in your particular situation.
It is worth mentioning that if any of the applicants is a Second Time buyer, the maximum LTV of 80% applies regardless of First Buyer status of the other applicant or applicants.
Typical mortgage length in the case of First Time buyers is between 25 - 35 years.
As you get older the maximum length of the Mortgage will be reduced. Banks tend to use 65 as the age until when mortgage has to be paid in full. For example, if you are 37 years old on the day you wish take out a Mortgage Loan, you can expect the maximum term of your Mortgage will be 28 years.
Fixed Rate or Variable Rate mortgage
Fixed rate mortgage means that the interest rate on your mortgage is set and won't change for the duration of the contract. Variable rate means that the interest rate can be adjusted in response to fluctuations of interest rates on the market. Lending institutions usually offer Fixed Rate for for a set period of time. Usually this has been 3, 4 or 5 years but I have recently seen offers of 10 or 15 years at a fixed rate.
During fixed rate period you have a guarantee that the monthly repayments will not change. On the other hand, if you decide to pay your mortgage back in full during fixed rate period, you will have to pay a penalty.
After the fixed rate period expires, you can freely repay the rest of your mortgage (congratulations if you have the funds to do so) and you can switch your mortgage to a different provider. You can also negotiate a new fixed rate period at current market rates.