Before you apply for a mortgage, or even determine how much of a deposit you’ll need to save, the first step is to find out how much you may be eligible to borrow by visiting our mortgage calculator.
There are a number of different ways in which lenders determine what you may be eligible to borrow.
Some will look at your total salary for the year, while others may determine the figure by calculating what percentage of your monthly income will be paid towards repayments.
Loan to income
According to Central Bank rules, a lender cannot lend an amount greater than 3.5 times the borrower’s gross yearly income in relation to a mortgage on a principal dwelling or, in other words, the house in which the borrower will be living.
This limit does not apply to buy to let mortgages.
So, as an example, let’s take a person who is earning €45,000 a year in gross income.
If we multiply this by 3.5 we get €157,500 which is the maximum amount a lender will be able to offer this borrower as a mortgage, however, this will also be subject to lenders affordability checks and lending criteria
Loan to value
For first time buyers applying for a mortgage on a principal dwelling, the loan to value limit on the amount they can borrow is 90% of the total value of the home.
This means that they will need to save or source a deposit for the remaining 10%.
This limit does not apply to non-first-time buyers who can borrow up to 80% of the value of the home after saving a deposit of 20%.
So, if a first time buyer wishes to purchase a home worth €300,000 they will be eligible to borrow €270,000 and will need to save a deposit of €30,000.
What can you afford?
Finding out how much you’re eligible to borrow is one thing but determining how much you’ll be able to afford in repayments per month is a whole other set of sums.
Many mortgage providers have online calculators which will breakdown how much your monthly repayments will be but in order to find out how much you’ll be able to afford you’ll have to take a look at your own finances.
One way of calculating this is to use the 28/36 rule.
This rule, also known as the debt to income ratio, states that the amount that you spend on housing per month (ie rent or mortgage repayments) should not exceed 28% of your gross monthly income and that total debt repayments, including housing and other debts, should not exceed 36% of your gross monthly income.
For example, if your gross monthly income (you can find this on your payslip) is €2500, 28% of that amount is €700.
This rule gives a guide as to how much you may be able to comfortably afford in mortgage repayments.
However, if your gross monthly income is €2500 and if the total amount of your monthly debt repayments including your mortgage repayments exceeds €900, which would be 36% of your gross income, you may find it difficult to meet your monthly obligations.
However, this does not mean that you are excluded from getting a mortgage.
A longer mortgage term would come with lower monthly repayments but also means that the home loan would be more expensive in the long run.
As you can see there’s a lot that goes into determining how much you will be able to borrow.
The good news is that you have the information at hand to be able to determine your own debt to income ratio, loan to income, and loan to value amounts.
By reviewing your own accounts and getting a clear view of your income and expenditure you will be able to get a good idea of how much you will be able to borrow and how much you’ll be able to afford in monthly repayments.
Bank of Ireland Mortgage Bank trading as Bank of Ireland Mortgages is regulated by the Central Bank of Ireland