Potential borrowers are becoming increasingly disillusioned about the process of getting a loan. More and more are finding that the amount of loan funding they believe they will be able to raise is not what they eventually get approval for.
In the past, mortgage brokers used to overestimate to potential borrowers how much an institution might be persuaded to lend. Borrowers thus took verbal offers directly from the institutions far more seriously. However, in today's far more competitive environment, brokers are finding that lenders are doing the same thing.
According to Mr Richard Eberle, managing director of Rea Mortgage Services, many borrowers are being misled by lenders who are becoming far more aggressive. He says it is not unusual for people who earn around £20,000 (€25,400) or £30,000 (€38,100) to be told they will be approved for amounts approaching five times their earnings. However, that rarely happens, if ever.
For many borrowers, this can cause big problems. Many believe they will be able to raise a loan of, say, £150,000 (€190,500), and go house-hunting on that basis. Of course, few people would actually bid without prior written approval, but according to Mr Eberle, this has happened. Whether or not people have bid, they are faced with the prospect of trying to raise perhaps £10,000 (€12,700) from another source - or looking at a different property.
However, the banks and building societies believe that once a borrower is far enough down the cash-raising process with them, they are unlikely to look for a loan elsewhere, particularly if the lower amount actually offered has been explained away as a decision of the credit committee or head office of the bank.
Borrowers should thus be very careful and not assume anything, unless they have it in writing on the letterhead of the lender involved, Mr Eberle advises.
Borrowers should also be aware that banks have completely changed the way they work out how much they can lend. Gone is the old "two and a half times salary" rule. Now, banks will often lend four, and on occasion, five times income.
But that is not the means by which the loan figure is worked out. Instead, banks generally use the "percentage disposable income" rule. In general, they will lend up to a repayment of 30 per cent of your net disposable income. This means outgoings such as car loans and credit card repayments are taken into account. So if you take out a loan of £200 (€254) a month to buy a car, that will be £200 less which you have available - and which the banks then take into account in working out your ability to make mortgage repayments.
This effectively cuts back quite seriously on the amount you will be able to borrow. On a mortgage interest rate of 6 per cent, an existing repayment of £250 (€318) a month would cut back the size of your loan by £40,000 (€50,800).
There is some flexibility, however. All lenders differ, but generally the percentage you can borrow goes up slightly at around the £30,000 (€38,100) salary level, with another jump at around £50,000 (€63,500). The theory is that people on higher incomes can spend a higher proportion of their income on a mortgage. However, it is rare for any lender to go much above 35 per cent of net disposable income.
On top of that, many borrowers can raise an additional £50,000 (€63,500) or £60,000 (€76,200) on their loan if they have a spare bedroom. The change in the recent Budget which allows up to £6,000 (€7,620) of rental income to be tax-free means that many buyers with a spare bedroom can assume they will be able to rent out a room, generating extra income.
