Why do mortgage interest rates fluctuate?

Since Ireland joined the Euro in January 1999, the European Central Bank (ECB) predominantly determines the interest rate charged by commercial banks and building societies to customers.

As the level of savings and consumption affects the prevailing interest rate in the economy, the ECB may decide to raise the interest rate if it feels there is a threat of inflation, where consumer spending is rising too quickly. If the interest rate is raised, the cost of consumer borrowing is increased, thus discouraging spending and reducing inflation.

However, on the other end of the scale, if the ECB feels that the Euro economies are not growing fast enough; it may decide to lower interest rates, thus decreasing the cost of borrowing and therefore encouraging spending. This can all prompt a change in variable mortgage interest rates, since most banks & building societies will have a corresponding movement of deposit rates and mortgage rates, e.g. a 1% increase in variable mortgage rates would generally be matched by a 1% increase in variable deposit rates.

Which is better for me - a fixed rate mortgage or a variable rate mortgage?

Fixed rate mortgage payments remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change. Most Irish lenders offer fixed rates over 1, 2, 3, 5, 10, and up to 20 years. The advantage of this type of mortgage is that it allows the lender to budget much easier. It is popular for first time homebuyers and those who are worried about the risk element of rising repayments, as it offers some protection from the threat of rising interest rates. However, these loans can sometimes carry early redemption penalties. They can also be poor value for money if the base variable interest rate offered is significantly lower than the fixed rate.

Variable rate mortgage payments rise and fall as the general market rates fluctuate with short-term interest rate movements on the financial markets. There are in general, no penalties for early redemption on this type of loan. However, it can be a hazardous option. As interest rates are very unpredictable there is always the underlying fear of soaring variable mortgage rates.

How do mortgage lenders determine the amount they will lend to individuals?

The process by which banks and building societies calculate how much individuals can borrow has changed. Many mortgage lenders had the general rule of thumb that the maximum a couple could borrow was 3 times the main salary, plus one times the second salary. However, most lenders have now abandoned this. They now use a combination of ways to work out what can be borrowed. While each lender will have its own formula for calculating how much it will loan, all criteria is based on the individual's salary package or earnings. They will look at a person's Annual Pre-tax Income, Net Disposable Income and current outgoings. Most lenders will normally be willing to offer as much as they think the person can comfortably afford to repay, taking into account annual earnings plus any additional guaranteed overtime and bonuses. As lenders now use quite different criteria, some lenders may approve a loan application, while others may decline it outright. In some cases, a person can borrow up to 95% of the purchase price of the house. The other 5% will act as a deposit and will be paid upfront by the buyer.

A person may be allowed to borrow more if someone, such as a parent, is prepared to act as guarantor to the loan.

What costs can I expect when buying a house?

A brief explanation on the most common costs occurred when purchasing a home:

Administration Fee: Some lenders can charge an administration fee for arranging the loan. This can be 0.5% of the total cost of the home loan. Most Irish lenders/mortgage brokers however do not charge any administrate fees. Shop around.

Deposit: Mortgage deposit must be paid upfront and are generally between 5%-15% of the value of the house, depending on the lender.

Insurance Costs

Buildings Insurance: Protects the home against unexpected events and disasters such as theft or fire.

Home Contents Insurance: Insurance for the contents of a property - protecting against the risk of theft or damage.

Mortgage Protection: This will ensure that mortgage repayments are met if the borrower is faced with a period of involuntary employment due to sickness or an accident.

Life Assurance: A compulsory cover with most mortgage lenders ensuring the mortgage is paid in full should the borrower die during the term of the loan.

Mortgage Indemnity Bond: This is a once-off insurance fee, which must be paid if the mortgage taken out is 80% or more of the property's value. It covers the higher risk that the lender is taking by granting a larger loan. Some lenders may pay this fee on your behalf, eg Bank of Ireland, EBS.

Legal Fees: These prices can vary. They are generally around 1% or 1.5% of the purchase price (before VAT). If however, you are also selling a house, further expenses will be incurred. Your solicitor will also charge you for administrative expenses such as telephone and fax charges, and for third party costs such as payments to the Land Registry or Registry of Deeds office.

Redemption Penalty: In the case of selling an old house to buy a new one, it is worth noting that most lenders of a Fixed Rate mortgage charge a redemption penalty when the mortgage is repaid, or in the case the borrower re-mortgages their home - before the term of the loan.

The usual penalty is a payment to the lender of three months' worth of interest but it can vary from lender to lender.

Stamp Duty on Property: First Time buyers are exempt from Stamp duty.For Owner Occupiers and Investors the Rates are as follows, First 125k  - exempt, Next 875k - 7%, Excess over 1million - 9%. 

Structural Survey Fee: A valuation survey, which establishes the suitability of a property for mortgage purposes and ensures it is not worth less than the proposed loan, can cost anything from €127 to €254.

A structural survey determines whether the property is structurally sound and highlights any faults which may be present and can cost anything between €317 and €444.

When you are buying a new property, you may also be selling an old one, so allow for the following costs:

Advertising

Removal fees

Furniture

Appliances

Decoration

Can I claim tax relief on my mortgage payments?

From Jan 1st 2002, mortgage interest tax relief is granted at source i.e. by the lender. Tax Relief at Source (TRS) means that the borrower's account will be debited with the amount of the full mortgage repayment when due and credited at the same time with the amount of interest relief.

The relief is limited to the standard rate of 20% and monetary limits also apply as per the chart:

First-time Buyers Limit

Married €4000

Single € 2000

Widowed €4000

Non First-Time Buyers Limit

Married €1,200

Single €600

Widowed €1,200

What is the Consumer Credit Act and what does it provide for me?

The main provision of the Consumer Credit Act is to provide protection for the consumer when seeking credit. The Act, which came into effect in May 1996, covers all areas of consumer credit such as overdrafts, hire purchase, credit cards, term loans and mortgages.

Most aspects of loan agreements are regulated by The Consumer Credit Act, including how it is "offered" or promoted by the lender, how it is "procured" or taken out by the borrower, and how the lifetime of the loan is operated.

It also enforces:

~ Detailed rules on the advertising of credit.

~ Clearly worded requirements for credit agreements.

~ The rights of a consumer to a 10 day cooling off period to withdraw from the credit transaction (not applicable for mortgages).

~ Controls on contact by the lender with the borrower.

~ Controls on transaction charges.

The Act has enforced regulations covering the area of mortgage and credit intermediaries, who are regulated by the Director of Consumer Affairs.

The Act also provides valuable protection for existing mortgage holders and new borrowers alike, specifically in the following areas:

~ No fees can be charged when a variable rate mortgage is repaid early.

~ No restrictions will apply to the choice of house insurance that a consumer has.

~ An annual statement will be issued during the life of the loan, detailing the amount outstanding.

~ The protection of the borrower in the event of the winding up of a mortgage lender.

When do I need planning permission?

The Planning and Development Act 2000 sets out the basis for all aspects of planning and building in Ireland. If you are unsure as to whether or not your development requires planning permission, you should contact your local planning authority (the Local Corporation, County Council or Urban District Council). Information is also available from the Department of the Environment and Local Government.

The law requires that you obtain planning permission for virtually every significant development.

There are certain exemptions however.

You can build small domestic extensions to your property if they are to the rear of the house and they do not exceed the height of the house nor do they increase the original floor area of the house by more than 25 sq m. There are also rules in relation to the height of such extensions if you do not want to have to apply for planning permission.

You can build a garage, shed, greenhouse or kennel without having to seek permission, if it does not extend out from the front of the building line of the house, and as long as it is no higher than 4 m tall in the case of a tiled or slated roof, or 3 m for other roof types. The development must also be less than 25 sq m.

Converting a garage for the purposes of domestic dwelling, such as a bedroom, is generally classified as exempted development.

In the case of buildings that are listed for preservation, it is best to consult with the local planning authority before any changes are made.

How do I obtain planning permission?

You can obtain a planning application form from your local planning authority - the County Council, Corporation or Urban District Council.

To apply, you will be asked for a fee and you may also be asked for development contributions towards the cost of roads, footpaths, water, sewerage, car parking or other service provided by the planning authority. This must be clearly set out for you.

Apart from the fees, you are generally required to submit copies of a location map and a site plan.

You are also required to make your application publicly known through local newspapers and by erecting a notice on the site. Copies of such notices may also be required for submission.

In general, permission will not be granted if your plans breach the local development plans that are drawn up every few years by the planning authority. These plans can be viewed by the public at the planning authority's offices and often also in local libraries.

The planning authority must make a decision on a valid application within eight weeks of submission. This can be extended by a further four weeks if there is a need for further information. Comments can be made by anybody on your application during this initial period and you are entitled to see these comments. If an application is turned down, the decision of the planning authority can be made to An Bórd Pleanála.