Colin McKiernan • 25 Aug 2023

Mortgage Repayment Capacity - all you need to know!

Purchasing a new home can be stressful and difficult at times, but generally an exciting period in your life.

When you make that big decision in your head to get the ball rolling, you know that there are some guidelines that need to be followed. The majority of us understand that we can only borrow a certain amount based on salary and we need a deposit.

Okay, brilliant – we have found a property within our salary range and have a deposit. We gather all the pay slips, bank statements etc. and we apply.

The hard work is done.

We hear back and it gets turned down due to no repayment capacity evidenced.

 

Nobody told us about this? What is this?

We have you covered.

Repayment capacity is the average amount you need to show on a monthly basis to prove you can afford a mortgage. Essentially, this proves that if you currently had a mortgage repayment, you are demonstrating that you can meet this on a monthly basis.   

Repayment capacity is just as important as your central bank guidelines, a bank will reject an application without the required level of repayment capacity evidenced.

 

So that covers repayment capacity on a generic level, but it’s a little deeper than just saving money.

Here is a couple of things to remember:

- Transferring €500 from your current account at the start of the month to your savings account and taking back out €250 at the end of the month does not mean you have shown €500 in that month. For this to be considered €500 euro savings, you must not touch any of this money.

- Repayment capacity is calculated over 6 months’ worth of savings – It will not be accepted even if it’s a day under 6 months. Ideally, you need to have a consistent level of repayment capacity for 6 months.

-Revolut statements count. You are not cheating the system by using revolut. They will be requested by the bank!

- Some expenses can be added back to your repayment capacity if they are once off in nature, but they must be genuinely once off. We have included a handy table below on this. Download here.

-Expenses can be added but similar to this, any once off credits must be taken away. These generally tend to be in the form of gifts received, proceeds of a house sale, large tax refunds and so forth. Receiving a large lump sum doesn’t solve repayment capacity issues.

 

Okay, so how do I calculate my repayment capacity?

For this, set 10 minutes aside, grab a strong tea/coffee and just one bank statement. Follow along with the steps and example below and try work out your repayment capacity. It may be difficult to follow along without a statement to reference.

On your statement go to the most recent transaction date (For us, this date was the 24th of Aug) and go back exactly 6 months (24th of Feb) and mark this point. 

Take your most recent balance (24th Aug) and deduct your balance from the 24th of February from this.

Then, analyze your statement, adding back any once off expenses and deducting any once off credits.

Note the net amount. Divide this by 6 to get your monthly average increase. Repeat for all your accounts.

Once you have all your accounts, add the monthly average increase together and you have your repayment capacity!

 

How much repayment capacity do I need?

2 options

Contact us here!

Or

Here is a handy link for gathering a rough estimate: Mortgage Repayment Calculator

All in all, a mortgage can be stressful, it really can but there are steps you can take to make the journey as easy as possible. Engaging with an advisor or mortgage broker from your very first thought of a mortgage is without doubt the best option. They can tell you exactly what you need to save, how to show your repayment capacity, how much you may qualify for and will find you the best deal.

Colin McKiernan


Contact Colin

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