Sadly at Switcheroo.ie we often need to explain to customers that the reason they cannot afford their dream home or be able switch to a better rate is because of the car loan they took out last year or the year before. While many do not see the direct trade-off between these purchases given the monetary size differences, purchasing a car will have a disproportionate impact on your ability to get a mortgage.
Getting a mortgage is all about having sustainable affordability. There are two levels to this. Firstly, the Central Bank of Ireland has laid out regulatory guidelines on the size of mortgage that can be provided to a customer(s) based on the multiple of Loan to Income (LTI) and ratio of Loan to the Value (LTV) of the property. There are exceptions allowed to the following rules but generally for first time borrowers the LTI should be no more than 3.5X and the LTV should be no more than 90%. For second or subsequent buyers the LTI is again 3.5X and the LTV should be no more that 80%.
The second level of affordability tends to be bank specific, with each using slightly difference metrics and measures to assess whether a customer will be able to pay their mortgage even with stressed interest rates. This is where personal and car loans come in. If you have existing financial commitments like a car loan then this takes from your ability to pay for a mortgage. How big is the impact? Let’s look at a couple of examples.
Central Bank data shows that at the start of last 2020 the average Car Personal Contract Plan (PCP) was ~€26,000. Using a leading car distributors online calculator, assuming a PCP contract value of €26,000 with a guaranteed future car value of €12,150, a term of 49 months and with an APR of 3.9%, the cost of this financing would be €348.58 per month.
The key figure here for mortgage affordability is the €348.58 which will be input into your affordability assessment. Assuming a mortgage term of 25 years and a stressed interest rate of 5.0%, this monthly PCP car contract cost of €348.58 will reduce the size of a mortgage that is affordable by a ~€60k, which could certainly make the difference between getting your dream home and not. Or being able to switch to a better rate, as banks use the same affordability calculations for switchers.
If you look at car loans which are typically paid off in full over a five-year period, the affordability impact is even more. A car loan of €26,000 with an APR of 6.8% will cost you €509.50 for 5 years which would reduce the size of a mortgage that is affordable by a whopping ~€85k.
Get a bike, bus, cheap second-hand car or even hitchhike if you need to but if you are considering a mortgage over the next few years be cautious of taking on a car loan or any other short-term debt.
Register @Switcheroo.ie and you can check out the impact of any short-term debt you have or are considering with our free mortgage financial health-check.
Alison Fearon is Managing Director of Switcheroo.ie
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