What is repayment capacity?
Put simply, repayment capacity is your ability to demonstrate that you can pay a mortgage. Lenders want to ensure that you, as a borrower, will be able to make your planned repayments. Repayment capacity is different to affordability which is calculated as income and outgoings. Both repayment capacity and affordability are equally important in getting a mortgage.
How is it calculated?
You should be able to demonstrate to lenders that you can comfortably afford to pay your proposed monthly mortgage amount over a minimum six-month period. This is a test of what is known as your ‘demonstrated repayment ability’. To check this, lenders will look at:
- Your monthly savings. Best practice is to save in a separate account to your current account. Try and save a regular amount each month and avoid dipping into this account unless an emergency comes up as we can add this back in as a one off. Unfortunately, holidays aren’t an emergency!
- Rent being paid and evidenced through a bank account (a paper trail for rent repayments is very important so don’t give your landlord cash where possible and if you do make sure it’s a lump sum taken from your account each month and marked as rent). Rent paid to parents is generally not taken into account.
- The monthly repayment on an existing loan that will be finished before drawdown of the mortgage can be taken into account however don’t rush out and clear loans as if they are cleared too far in advance of applying for a mortgage, the monthly payment won’t be taken as Repayment Capacity.
- Investing in stocks and shares or Crypto Currency generally will not be taken as Repayment Capacity.
These actions serve to create a paper trail of your monthly outgoings whether they be savings, rent, or loan repayments. This will prove to a lender that you are able to keep up with future repayments when the time comes.
How much do I need to save?
Even though you have regular rent payments on your bank statements, and you’ve been saving as much as you can, there is another factor that comes into play. You need to be sure that these actions relate to a specific amount that is, your future repayments.
So, before you jump right in and start saving like there’s no tomorrow, you should sit down with one of our mortgage advisors to work out exactly how much you can borrow, your loan term, and your future repayments.
Even falling short €50 a month will have a big impact on your repayment capacity. If your repayment capacity falls short of the amount you wish to borrow, you will more than likely be set back a few months. As an example, if a mortgage payment per month is going to be €1,000 per month, a lender will want Repayment Capacity of €1,000 per month demonstrated over 6 months prior to application.
How can I improve my repayment capacity?
For anyone who has had trouble with repayment capacity in the past, don’t give up hope. For many applicants, proving that they are able to meet monthly repayments is a real stumbling block. Here are 4 tips that will help you get back on track.
- Speak to one of our Mortgage Advisors first and foremost! They will explain how much you need to save to match repayment capacity.
- Start saving regularly.
- Pay rent via your bank account so the payment is clear.
- It may be beneficial to clear short term debt but talk to a broker first.
What are the main mistakes people make in relation to repayment capacity?
One of the biggest mistakes people make when saving for a mortgage, is not keeping a paper-trail of their outgoings. So even if you are making more than enough to meet future repayments. It might not necessarily look like this from your bank statement. This is because money is just not staying around in your account long enough to demonstrate your repayment capacity.
For example, if rent is being paid to a landlord but not through a bank account or visible by way of monthly withdrawals from a bank account, then this needs to be regularised for a 6-month period. The rent payment should be easily identifiable in the borrower’s current account.
Another reason is where people are saving a set amount each month. Often times people review their savings account, they are surprised to find their “savings” are being withdrawn regularly. On some occasions so regularly the account balance is only increasing fractionally or in some cases not at all. If you are looking to improve repayment capacity, try not to touch your savings for a 6-month period or longer if possible.
The great news is lenders only require 6 months evidence to prove repayment capacity. So even if you are not ready today, 6 months is a short time to wait.
