Paying for a home in Ireland

Information

Buying a home in Ireland, whether you are purchasing for the first time or selling an existing home is a considerable financial decision. House prices in Ireland over the past ten years have risen enormously and unless you are one of a very small group who can afford to buy a house outright, you will have to borrow the money and pay back the loan, usually over 25 to 30 years. A loan used for the purpose of buying a house is commonly called a 'mortgage'.

The following information will guide you through the various sources of finance when you are paying for a home. Detailed information on the various costs associated with buying a home is available here.

Sources of finance

There are broadly two sources of finance for buying your own home: commercial lending agencies such as banks and building societies and local authorities.

• Banks and building societies

Practices vary between different organisations so it is important to shop around. Generally you will be able to borrow two and a half times your annual salary where there is one earner in the household or two and a half times the higher earner's salary plus the other salary where there are two earners. Many organisations may offer to lend you more than this, but be very careful not to over commit yourself. Lenders now offer up to 95% of the value of the house in some instances.

• Local authorities

If you cannot get a mortgage from a building society or bank to buy or build a house, you may be eligible for a loan from a local authority.

Types of mortgages

Broadly speaking, there are two types of mortgages: annuity and endowment.

• Annuity mortgages

This is the traditional mortgage and by far the most popular. The loan is taken out for usually 25 to 30 years during which time the loan is repaid with interest. (Some lenders now offer 35 or 40 year mortgages to first-time buyers or younger buyers). Each repayment covers the interest and something off the loan. In the early years of a mortgage, interest forms the largest part of the repayments so the amount owed reduces very slowly at first and then much faster towards the end of the mortgage. The interest rate moves up and down in line with general interest rates, so if interest rates go up or down, your repayments will go up or down too.

There are some variations on the standard annuity mortgage. A fixed rate mortgage provides a loan with the rate of interest fixed for a period of time. The advantage of this is that repayments are fixed and can be budgeted for accurately. The borrower gains if interest rates rise above the fixed rate and loses if they fall below it.

A low start mortgage postpones payment of some of the interest that is normally paid at the beginning of the loan by adding it to the amount of the loan, so that the loan increases over time. After a fixed period, normal interest is paid and monthly payments increase. Some people may be drawn to this, but it is important to be sure that you will be able to afford the increased repayments; and to realise that if interest rates rise, you could be in a situation where the outstanding loan is worth more than the value of the house.

The advantage of an annuity mortgage is that there is very little risk compared with an endowment mortgage. However, repayments usually depend on general interest rates and these mortgages tend to be expensive in the earlier years of the loan.

• Endowment mortgages

With an endowment mortgage, the borrower takes out an insurance policy that is designed to repay the entire loan, usually after 20 years. So each monthly payment consists of the premium on the insurance policy and the interest on the loan. Nothing is paid off the loan until the policy matures. At that stage, there should be enough to pay off the whole loan, and possibly an additional lump sum. There are a number of different types of endowment mortgages and variations but the basic principle is the same.

The advantage of an endowment mortgage is that it generally offers better tax relief, although in recent years, the advantages have been reduced. However, the net repayments in earlier years are usually higher than those on an annuity mortgage. In addition, there is some risk since there is no guarantee that when the insurance policy matures, there will be enough to pay off the entire loan. A further disadvantage is that they are less flexible than annuity mortgages. If you get into financial difficulties, there is no scope for cutting repayments temporarily.

Mortgage income tax relief

Tax relief is available on the interest portion of any loan or mortgage taken out to buy or to repair and improve your home. With effect from 1st January, 2002, your mortage lender now gives you the benefit of tax relief on interest paid. This means, that your mortgage repayment will be reduced by the amount of tax relief and the lender then claims this tax relief from the Revenue Commissioners.

If you take out a bridging loan while you are waiting for the mortgage loan to come through or because you bridging finance between the sale of one home and the purchase of another, you can claim tax relief on bridging loans. Read more about mortgage income tax relief/tax relief at source here.

Getting loan approval

It is sensible to talk to potential lenders before you start looking for a home. A lender will tell you how much they are prepared to lend you, based on your income, your credit record, your employment record, other borrowings, etc. This approval in principle may save you a lot of time later on.