Getting a Mortgage
The two main types of home loans are annuity mortgages (the most popular) and endowment mortgages. Annuity mortgages also have several variations such as "fixed-rate" and "low start" mortgages.
You should seek independent financial advice to decide which mortgage will suit you best - both at the start and throughout the course of the loan. You are also entitled to relief on the interest you pay on the loan, so also you need to take this into account.
When you ask for a mortgage, the bank or building society will set an upper limit on how much they will lend you. This is based on a multiple of your annual salary or, if you have two earners in your household, on multiples of your two salaries.
Annuity mortgages
With annuity mortgages, you pay back the loan each month, with interest, over the agreed term. Early on, the interest forms the largest part of the repayments so the amount owed reduces very slowly. But it reduces much faster towards the end of the mortgage.
A fixed-rate mortgage is a variation of this type of loan, and the rate of interest is fixed for an initial period. Another variant is a low-start mortgage: instead of paying interest at the beginning of the loan, this is postponed and added to the amount of the loan, so that the loan increases over time.
If you are thinking of a variant on an annuity mortgage, remember that
- With a fixed-rate mortgage you gain if interest rates rise above the fixed rate, but lose if they fall below it.
- Low-start mortgages may sound attractive, but be sure that you will be able to afford the increased repayments later on, and remember that if interest rates rise, you could be in a situation where the outstanding loan is worth more than the value of your home.
Endowment mortgages
Endowment mortgages have largely gone out of fashion in recent years. They involve taking out an insurance policy that repays the entire loan, usually after 20 years.
Each monthly payment combines the premium on the insurance policy and the interest on the loan. Nothing is paid off on the loan itself until your policy matures. In theory, there should then be enough to pay off the whole loan, and possibly an additional lump sum.
But while an endowment mortgage may appear to have better tax relief, it is more risky than an annuity mortgage. There is no guarantee that when the insurance policy matures, there will be enough to pay off the entire loan.
An endowment mortgage may also involve higher net repayments in earlier years, and isn't flexible: if you get into financial difficulties, there is no scope for cutting repayments temporarily.
Local authority loans
If you can't get a mortgage from a building society or bank, you may be eligible for a loan from a local authority. To apply for a local authority loan, contact your local authority directly.
Loans can be up to 97% of the house price, subject to a maximum loan of €165,000, and repayments cannot be more than 35% of your household's net income (in other words your total household income after tax and PRSI).
Mortgage protection
When you get a mortgage, the bank or building society will insist that you take out a mortgage protection policy. This is a special type of life insurance that runs during the term of the mortgage, and ensures that the mortgage is fully repaid even if you die.
While you have to have one of these policies, it doesn't have to be a mortgage protection policy offered by your mortgage lender. You are perfectly within your rights to opt for a product from another company, so it pays to shop around.
Mortgage protection should be payable on a joint life, first death basis. This means that the mortgage will be repaid on the death of the first partner (if a couple is involved).
Review your mortgage protection policy on a five-year basis, and take out additional cover if necessary (for example to cover extensions of the term of the mortgage). Always keep up with the premiums - otherwise the policy may lapse, and you won't be able to claim.
Tax relief
You should be entitled to tax relief on the interest you pay on a mortgage - or indeed on any loan taken out to buy, repair or improve your home.
You can also claim tax relief on a bridging loan. You might need this bridging finance if, for example, you are putting an offer on a home but
- The sale of your own home hasn't come through yet or
- You are still waiting for the mortgage loan to come through
Mortgage interest tax relief used to be directly given back to you by the Revenue Commissioners. But now your mortgage lender can give you the benefit of tax relief on mortgage interest paid.
This is known as Tax Relief at Source or TRS. The mortgage lender reduces your mortgage repayment by the amount of tax relief (and they then claim this tax relief from the Revenue Commissioners).
Talk to your financial adviser about your entitlements, or seek free advice from your local Citizens Information Centre.
Learn more
Check the Financial Regulator's consumer website for its guide Mortgages Made Easy, or obtain a copy from its information centre at 6-8 College Green, Dublin 2
If you are making mortgage repayments and not receiving tax relief, contact the Collector General at Lo Call 1890 463626 or apply online
Find your nearest Citizens Information Centre