How banks determine what you can borrow

How banks determine what you can borrow

Banks will make you undergo a stress test to determine how much you can borrow

Every single new enquiry we get at Irish Mortgage Brokers has the same general question, ‘can I get a mortgage and if so how much?’. The day people stop asking that question is the day we close our doors!

The first thing you have to do is understand that there is an underwriting process and that banks squeeze potential borrowers ability to pay from above and below, what we mean by that is they will take tax and any embedded expenditure (like existing loans for cars, credit cards, hire purchase etc) off the top and then from below by insisting that you have a certain amount of disposable income left.

The bit in the middle is what you can use to fund a mortgage, and it is generally not allowed to be above 40% of your NDI (or ‘Net Disposable Income’). With other lenders it can’t be beyond a certain multiple of your income, this is furthered by a ‘stress test’.

Stress testing something is basically a scenario analysis, in lending it is fairly simple, you take your assumptions of available income which we just described then you consider whether or not the person would be able to afford that loan if their interest rate was 6% (different banks use different numbers, this is just for an example). They then consider whether that mortgage would break the borrower at that rate – often by seeing if it would be above 50% of their disposable income, or more commonly be determining your residual income in that situation.

So if you could afford a loan for €150,000 using the calculations but when stress testing were left with only €1,000 to live on you don’t qualify. I’ll do an example using AIB calculators, there are two of them the first is a DSR (debt service ratio) the second is an affordability one.

We’ll assume a person earns €35,000 a year and they want to buy a house for €200,000. The assumptions here are that they are in full time employment, they saved up a deposit, there is some proven ability to afford the loan (savings or paying rent) and nothing out of the ordinary in terms of their line of work.

They look to borrow €180,000 (90% loans are still the most popular amongst first time buyers) over 35 years (which is still the most popular term). Their gross income is €2,917 per month and their net income is €2,470. A loan of this amount would take up 41% of their disposable income according to the first AIB calculator, meaning they’d be turned down – even if they were paying more in rent and could prove that they were a good prospect.

The maximum allowable is €165,000 which is before we get into the residual income calculations. With AIB (I keep referring to them as they have the best rates at the moment and are the first port of call for many applicants) a single person has to have a residual income of €1,250 per month, a couple need €2,000 and then you add on €250 for every child.

In effect what this means is that it is incredibly difficult for married people with children and one income to borrow, that is just an observation as opposed to an accusation. It is also tough for single applicants because saving on one income as well as gross prices for a property make it difficult.

The side effect of criteria at present is that lenders want couples with two permanent jobs and good savings, there is a strong preference for people in IT (even over civil/public servants) and while the headlines always say that banks are not lending – and I support that view in general – in particular they are to certain prospects, and they tend to have different profile preferences which is why you shouldn’t take a single ‘no’ as a ‘no from everybody’.

In fact, something that keeps brokers alive in the market is when people go to the branch they have been loyal customers of for 20 years and get told to shove-off (nicely of course) when they ask for a mortgage, there are still several active lenders, the criteria and policy differs from one to another, and even successful loans take time; welcome to lending 2012 style!


Irish Mortgage Brokers


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  30. Gil at 4:57 pm

    BOI told me recently that my existing house, which is rented long term and covering the mortgage plus, is a liability, not an asset. Similarly my boyfriends profitable company is a liability and not an asset, despite earning him a decent consistent wage for the last decade. My long term well paid contract job to the public sector is also considered as zilch employment as its not a permanent position… whereas when i was permanent I was out of the blue made redundant – but would have counted for a mortgage…. At least on a contract i know 12 months in advance when i’ll be out of work.

  31. Peter Paul at 4:45 pm

    The American banks likewise have been ordered to tighten their mortgage regulations and underwriting criteria quite a bit, similar to the stress testing Karl describes. The old rule of thumb was that a prospective borrower could get a mortgage of about three times (2.8-3.6) times gross household income at interest rates in the 6-8% range. That makes a 180K loan on a 35K gross income completely unrealistic.
    It also suggests that for a housing market to be affordable, median house price should be roughly 4 times (assuming a 25% downpayment) median gross household income of housebuyers (starters and upgraders). Many areas are still far off that ratio, and either people will continue to over-extend their finances, or the housing market will need to collapse further.

  32. Jim Clancy at 4:41 pm

    ” I believe that banking institutions are more dangerous to our liberties then standing armies.
    If the American people ever allow private banks to control the issue of currency,first by inflation,and then deflation,the banks and corporations that will grow up around (these banks)will deprive the people of property until their children wake-up homeless, on the continent their fathers conquered. The issuing power (of currency)should be taken from the banks and restored to the people,to whom it properly belongs.”
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  33. Tony Murray. at 3:26 pm

    How many people are on 35k per annum (starter professional wage)

    How many are below this (lots, service industry etc…)

    See who can afford to purchase – (market population.)

    Do a review of and for properties for sale. Put in the search terms: House, max payment 100k, then max payment 125k, and then 150k. Limit the size to say 1200sqm.

    Remember to always factor in refurbishment costs into your affordability position: (10k to 100k)

    See where the value is!! Currently…

    Do people think there is value for money currently in property, for the average consumer? Perhaps your blog could explore this.

    Considering, Price, long-term costs, future interest rates (14%-18%), job security, reducing income… overtime ban, (add factors here as you think of them… They are most likely relevant.)

    Flexibility and Mobility: where in the Global village! Global Economy!

  34. Tony Murray. at 3:06 pm

    Making comparisons to the past is energy wasted. The only value in the past experience is we know what not to do in the future. There are the slow learners of course, and those who refuse to learn because it serves good purpose to maintain that devil may care position. Someone will pay!!

    Italy and France have a responsible framework 33% threshold. People without disposable income stave local business – they’ve nothing left to spend. Business and jobs and growth go south! We need to get away from the ‘property market’ as the only show in town. I agree that property is still overpriced relative to peoples ability to pay. What can people afford. The trouble with this is that large investors that can afford will purchase large scale, facilitated by the supply end, and hold renters to ransom down the road. With the same result to local business, jobs, and growth in the domestic economy.

    Using a general example of a person with a apartment and caught in negative equity as described above. They make a chance approach to the bank and surprise they are offered a further 300k to purchase a nice house using the rental income of a unpaid apartment in negative equity as a asset for the banks to hold.

    The apartment is in 150k negative equity. So the holder of both mortgages holds the speculative advantage on two properties, and is for a up-side advantage sometime in the future. The banks on the other hand hold all the risk – and the taxpayers’ as well! For the slow learners! This is the past…

    House prices have much further to fall! There is no market equilibrium – just the remaining wriggle of speculative activity.

    My calculations puts a 35k income at a threshold of 110-115k. I would have like the broker to have unpacked his example to its final conclusion… I feel it is truncated in parts.

    Comments, Criticism and Corrections welcome

  35. Robert Clair at 2:13 pm

    Guess what got the housing market in the downturn that it’s in now. Greedy bankers and real estate agents. The bankers did not do their stress tests and the real estate agents lied on the mortgage applications.

    It all came to a head when the home owner could not meet their obligation because they were in over their head.

  36. Patrick at 1:12 pm

    The criteria operated now and in pre deregulated times, are the proven factors,applied in my fathers time to safeguard against all that was evil in the so called boom/bust period. It has to be hoped,that never again will our people be led blindly down the road to disaster and despair.Our young people deserve this, and more. So lets lead by example, and continue to safeguard against irresponsible lending.Banking as once was must return to the equitable principles, that governed the entire practice of lending for the right reasons,and goodwill on both sides.The screw you culture I hope, has been eroded from our society.For the good of all of our people, and the pride we still have in this country,lets send out a genuine come and see the new welcoming Ireland. At least that is my hope?? and yet I wonder if our people at the top are doing as much as might be done to eradicate this terrible greed that exists in some quarters ??.

  37. Paddy at 12:13 pm

    The loans are not too small, it’s the houses that are too expensive. In any case it is unrealistic to expect a family with a gross income of €35k (€29k net) to afford a €200k house. How will they enjoy any kind of life when such a debt hangs over their heads, just one slip that impacts on the family’s ability to pay and the home including their deposit will be lost. Better to pay rent, even if a few Euros more than the current all-time low monthly payment on a 35-year loan.
    Do a simple risk assessment, rates can only go one way, and that’s up. To advise a family to buy under such circumstances is criminal.

  38. Edward J Booth at 12:02 pm

    Banks have gone from one extreme to another. A couple of short years ago they were over the top completely in their efforts to throw as much money as possible to people seeking mortgages and now the pendelum has swung completely in the opposite direction. Now Banks are much too restrictive in approving mortgages and are limiting the funds far too much, when the country needs a more active house market to get things kick-started again. I have had an experience with AIB which would defy belief as they now have “new rules” and logic simply goes out the window. EB

  39. David at 11:51 am

    I live in France and there is there is a similar notion of “mortgage payment cannont exceed 33% of NDI”. Sometimes it’s stretched to 35/36% here. I get the logic, but what I have always found hard to understand is that’s it’s the same rule for guy on the minimum wage as it is for a well-paid manager on 120K/year. Surely the % allowed should increase with overall salary.
    To take an extreme example, a pro-soccer player earning 200K/week will still live comfortably even if his mortgage payment = 90%!! of his NDI.

  40. Max at 11:50 am

    This is nothing different from happens in many other European countries, actually in countries like Italy the standard is to have a 20% deposit and the mortgage payment should not exceed 33% of you monthly disposable income.
    I wonder if there are any Euribor indexed mortgages in the Irish market as they exist in other European countries.
    With a standard variable rate you are at the mercy of the bank in relation to the interest rate.

  41. Lorna O’Brien at 11:50 am

    A couple pay 1200 euros a month in rent. They have some fixed income and some income from self-employment and consultancy work. They have no debts at all (that’s right – no overdraft, no car loan, no credit card debt). They are looking for a 50% mortgage because they have significant savings. Their monthly mortgage repayments would be about half the monthly rent, making them 600 euros a month better off. They cannot get a mortgage because their fixed income is deemed insufficient for their family needs. The rest of their income is not being used to assess their ability to repay the mortgage and the fact that they have been paying out double the mortgage payment for the last 4 years without incurring any debt at any time apparently is irrelevant in the eyes of the mortgage lenders. How ridiculous is that! They feel very helpless and desperate about this situation. Any thoughts on how they can get out of this mess?

  42. Al at 11:42 am

    Simple enough then, house prices need to come down further.

  43. G at 11:40 am

    My biggest frustration recently in looking into mortgages is that AIB won’t allow any rental income against an existing property. Take the many young couples with apartments who are looking to move to a house. Even if you firmly believe that you could rent out your existing property (that you might not be able to sell due to negative equity) to cover an existing mortgage, AIB still assume you’re paying the full value. This is completely unreasonable. Other banks will at least allow for a percentage of the mortgage to be covered by rental income.

    • Ramona at 3:37 pm

      This way you could get 100 properties & rent them all. All rent would go towards mortgage payments & you would have 100 properties after 35 years 😀

      • Melissa Nicholas at 7:11 pm

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        Ba mhaith liom mo bhuíochas dáiríre a chur in iúl agus comhairle a chur ar na hiarrthóirí iasachta amach ann a bheith an-airdeallach toisc go bhfuil go leor scamadóirí ann ansin chun calaois a dhéanamh ar na hiarrthóirí iasachta neamhchiontacha, mar sin caithfidh tú a bheith cúramach agus airdeallach .. dóibh siúd a dteastaíonn iasacht uathu Molaim Kathy Finance Inc, is féidir leat teagmháil a dhéanamh leis an gcuideachta trí ríomhphost: (

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