Mortgage transactions are long-term credit arrangements (loans) that are normally taken out to finance the purchase of land or property. Mortgages are usually taken out through a bank but can also be done through the local authority or privately between individuals. It is a transaction in which a person borrows money from lender. The mortgagor (“the Borrower”) and mortgagee (” The Lender”) enter into a written agreement which sets out the specific terms and conditions on which the money is being given. The property being purchased will act as security or collateral for the loan. If the borrower breaches the terms of the loan or defaults on the agreed repayment terms, the loan agreement will set out the options the lender may take. This will include repossession of the property.
How are mortgage payments calculated?
That depends on the type of mortgage being offered. Most commonly, monthly payments of a mortgage are calculated in two parts: interest payments and capital repayments. At the end of a mortgage term, one will have paid in full for the property.
Initially, the majority of the repayments will be used to pay off the interest. The interest on the repayment will diminish as the amount decreases. And, as time passes, more of the monthly repayments go toward paying off the capital. You can have fixed or variable rate loans.
With variable rate loans, interest rates fluctuate, and one of the causes of high interest rates is rising inflation. Remember, adding a few more years to a mortgage term will reduce monthly payments. However, doing this will increase the total amount that we will have paid overall. For example, if we borrow €250k at 3% for 25 years, we will pay €105,658 in interest on top of the capital. If the repayment period is prolonged to 30 years, we will end up paying €129,444 in interest on top of the capital. That’s an additional €23,786!
How much mortgage can one qualify for?
Banks and mortgages have regulations that limit the amount that they can lend a person to buy a house. These regulations are stipulated by the Central Bank of Ireland. The regulations include two kinds of limits: Firstly, loan-to-income (LTI). This is based on the ratio of the size of the loan to the income of the borrower. Secondly, loan-to-value (LTV). This is based on the ratio of the size of the loan to the value of the home that is to be purchased. Lenders also have some flexibility to make exceptions to these limits. To comply with the law and the European Central Bank’s requirements, both of these mortgage regulations must be met in order to qualify for a mortgage.
The Irish Government has recently increased the LTI requirements for borrowers up to 4 times that of their gross income.
How does mortgage insurance work?
It will be a precondition of any loan that the Borrower have adequate house insurance and life protection in place before they will release the mortgage funds.
Life cover or mortgage protection policy, in the event of death of one of the borrowers will clear the remainder of the borrowers’ mortgage. It will be a condition of the loan that the borrower maintains a valid mortgage protection policy throughout the duration of the agreement.
That is why Banks are reluctant to issue mortgages to older individuals. If a person dies without mortgage insurance protection, there will be no insurance policy to pay off the loan. This means that the joint owner or beneficiaries will have to continue paying off the mortgage.
Which mortgage will be the most suitable?
Before taking out a mortgage, it is essential to do your research and find a loan that facilitates affordability. We have to make sure that our loan payments will be covered as part of our expenses. Also, it is essential to get specific details regarding the mortgage agreement from the lender. All of this information will be included in your loan offer, which will be sent out to your solicitor.
This will include the time-limit, type and duration of the credit, total amount and the potential risks. When taking out a loan, there are also other costs and fees that need to be considered. Some lenders charge arrangement fees, which may be a percentage of the loan amount, such as 0.5%, some will offer cash-back. Therefore, do research first or get in touch with a professional for advice on which plan will be the most suitable.
Consider speaking to a mortgage broker who will be in a position to do the heavy lifting for you. They will be able to advise you on the most suitable option for your circumstances.
This is a brief overview on the basics of mortgage transactions. For further details on mortgage or property related laws, contact our offices and get in touch with us today.