Borrowing Limits Examples
Example: A single person with annual income of €75,000, would qualify for a mortgage of 4 times gross salary which is €300,000.
Gross income of €75,000 equates to a net income of approximately €4,400 per month.
The repayments on a mortgage of €300,000 at 3.5% over 35 years is €1,240 per month.
The percentage of net income is 28% which would be considered reasonable.
It is helpful to stress test the mortgage by 2% to see what repayments would be. In this case if we stress tested the mortgage to 5.5% the repayment would be €1,611 per month, which is 36% of net income.
Considerations
The first test is the income limit, which in the above case is 4 times gross income.
The second test is the stress tested repayment figure, and you should be comfortable with this monthly commitment.
Normal living expenses are a feature of mortgage underwriting. It is generally accepted that a single person will need €1,500 to cover day to day expenses including food and household, clothes, entertainment, transport, medical, utilities and memberships of clubs etc.
In the above example this individual should have €1,300 left after paying their mortgage and covering normal living expenses.
Mortgage Term Considerations
In this example we looked at a 35-year mortgage term and the repayment was €1,240.
If the borrower chose a 30-year mortgage term the repayments would be €1,347.
And if we look at a 25-year mortgage term the repayments would be €1,501.
In this instance the borrower could shave ten years of their mortgage by paying an extra €260 per month.
If the borrower wanted to start the mortgage at the 25-year term they would need to show the appropriate repayment capacity. We can see in this instance that the client would appear to have the capacity to pay more per month. This is something anyone getting ready to apply for mortgage should bear in mind as the lender will need to see evidence you can afford this.