A Contractor’s Guide to Mortgages & Buying A Home

Webinar Transcript + Recording

This webinar formed part of Berkley’s series, “A Contractor’s Guide to Personal Finance.” This two-part series aims to address common questions that contractors have about personal finance matters. In episode one, we focused on the topic of mortgages and buying a home. 

First, we hear from Margaret Barrett – a Senior Advisor with the Bank at Work team in Bank of Ireland, Cork City – who dispels common myths about mortgages for contractors. In the second half, we hear from David Sweeney of Sweeney Solicitors who offers a detailed walkthrough on the legal processes involved in purchasing a property.

Webinar Recording

Webinar Transcript

Interview with Margaret Barrett

Margaret is a Senior Advisor with the Bank at Work team in Bank of Ireland, Cork City. If you have any additional questions for Margaret, let us know and we can put you in touch with her.

For PAYE employees who receive a monthly salary from an employer, the company will need to confirm that salary by providing a salary cert. Employees also need to supply their last two payslips and a P60 form from the Revenue.

Contractors are sometimes worried about speaking to the bank about a mortgage. However, banks are very much open for business when it comes to contractors. Contractors are classified as self-employed so the assessment process differs slightly. As their income can vary month-on-month or week-on-week, the bank assesses your income over a two-year period. When assessing a contractor’s mortgage application, the bank looks for:

  • Your last two years’ certified/audited accounts
  • Form 11s or a Notice of Assessment from the Revenue from the previous two years

To get an idea of the kind of salary that we can lend on, the bank averages your income from the previous two years.

Absolutely, so don’t discount your application just because you’re on a contract. 

I see this a lot in the pharmaceutical industry. Many people transfer from one of the multinationals into Ireland on a contracting basis. For example, you might have someone who has been working for Eli Lily in another country on a contract basis and then they transfer to Ireland on a contract basis. 

We like to assess a Stamp 4 Working Visa. However, those with a Critical Skills Visa should also speak to us because we’ll assess it on a case-by-case basis. 

When assessing these applications, we do like to see that the contract has been rolled. We also like a contract to be 12-months in length, but if it’s a rolling six-month contract then we will still assess it. Income aside, we also assess loan to value (LTV), loan to income (LTI), and ‘demonstrated repayment ability’. 

No. That is a myth. 

To give you an example, you might have an employee working in a permanent position with a multinational company who is now moving over to a one to two year contract role within the same company. Then there are two things that the bank needs to understand: 

  1. Why they’re moving over 
  2. If the contract doesn’t work out, can they be re-employed for the salary that they were previously on? 
  3. We like to see that the contract has rolled as that demonstrates that the company is satisfied with the employee as a contractor. 

For joint applications, if both people within the couple are contractors – they will be assessed individually per contract. 

Sometimes, we’d have a contractor and a PAYE employee but the PAYE might be on a probationary period. In that case, they’re treated in a similar way to a contractor as the probationary period has to be completed before the mortgage draw-down. 

Help to Buy (HTB) Incentive 

If an applicant is a first-time buyer, they may qualify for the Help to Buy (HTB) scheme. The government has provided this scheme since 2017.

First-time buyers can only use the scheme to buy new-builds or self-builds. 

In its previous format, HTB covered 5% of the purchase price of a property to a max of €20k. Last July, that was increased to 10% of the purchase price of the property to a max of €30K. 

Let’s say, you’re buying a new-build for €300K. If you qualify for the max amount from the HTB scheme, you will receive €30K towards the purchase price of that property and this equates to your 10% deposit. According to the Central Bank of Ireland Macroprudential Rules, the bank can only lend 90% loan-to-value (LTV) for first-time buyers and 80% LTV for movers. 

The bank will like to see personal contributions to a certain degree. But if you’re sitting on €2-3K of regular savings and you’ve been paying a significant amount of rent every month then that’s a good-quality application from an assessment perspective. 

Can contractors apply for HTB? 

Yes. The amount of funding they’re entitled to is based on how much tax they have paid to the Revenue over the past four years. If a PAYE employee is applying, they will need to submit their last four years of P60 forms. You can apply for HTB online through myAccount or Revenue Online Service (ROS).  

Local Infrastructure Housing Activation Fund (LIHAF)

There’s another scheme that’s specifically available in Cork called LIHAF which comes through Rebuilding Ireland. It’s a further contribution to the purchase price of a property issued through the local council.  

The Ballinglanna housing development in Glanmire has qualified for the LIHAF scheme. LIHAF is available for the first 110 properties of the estate. The purchase price of the properties is €350, however, eligible first-time buyers can receive €20K; lowering the purchase price down to €330K. On top of that, you can also get your HTB scheme. So that makes it really affordable from a purchaser’s perspective. 

The very first thing you need to do is talk to the bank. I like speaking to customers who are anywhere between 6 – 24 months out from buying their property. This means that if there’s anything that doesn’t fit inside a good mortgage application, we have plenty of time to correct it. 

Sometimes contractors give me their accounts for 2018/2019 and their 2020 account isn’t ready yet. If their 2020 accounts are stronger than the other years, then I would advise them to wait until they have the revenue document for 2020. I’ll be averaging out their accounts over the past two years and I want to use the higher amount because I’m lending up to 3.5 times on their average salary. 

Macro-prudential regulations from the Central Bank stipulate that mortgage providers can lend a maximum of 3.5 times a gross combined salary. When assessing, we have to consider loan-to-value (LTV) and loan-to-income (LTI) limits. So with a contractor, we just have to average the figure out by salary years. 

We also have to make sure that we’re lending loan-to-value. First-time buyers can borrow up to 90% of the value of the property. This rate is 80% for movers and 70% for those buying investment properties. When assessing an application, I have to ensure that the applicant has enough funding to bridge the gap between the 90% and the 100%. 

The third thing we look for is ‘demonstrated repayment ability’. If I’m assessing a mortgage application for €200K with repayments of €1K per month, then the applicant has to demonstrate to me that 1K has come out of your bank account comfortably for the past 6 months. Demonstrated repayment ability can come out in a few different ways such as rent, regular savings or if you’ve paid off a personal loan (not a car loan but a personal loan).  Demonstrated repayment ability can be the one thing that catches people. For example, we can’t prove demonstrated repayment ability if you live in a house share where you’re paying your part of the rent in cash. This is because I can’t see the money coming in and out of your bank account. If you’re in that situation,  set it up as a 365 Transfer or a Standing Order. In other words, make sure that you’re using your bank account to demonstrate everything you’re doing. 

The final thing that we’ll check on a mortgage application is called your ‘net disposable income’. Banks need to ensure that they’re lending responsibly and that borrowers can comfortably repay the loan while also enjoying the lifestyle to which they are accustomed. When assessing your net disposable income, we look at the applicant’s dependents and if they have any outstanding loans. 

If you have been furloughed and are receiving the Pandemic Unemployment Benefit Payment (PUP), then we can’t assess at this stage. However, we can do an initial assessment on the basis of you eventually returning to full employment. We would only do an initial assessment, in other words, we wouldn’t proceed to the underwriting stage. This is because, in theory, that person is unemployed at this point in time. Once everything has calmed down and you have returned to full employment we would reassess. 

We accept gifts as part of the funding. 

Ideally, the gift will come from a blood relative as the threshold for gift tax is broader. We’ll ask the gift-giver to complete a gift letter in which they stipulate that they hold no legal interest in the property and that the gift is non-refundable. We then check that the funding is evident in an Irish bank account. 

We also accept gifts that come from abroad. We’d ask for that gift letter and a Banking & Payment Federation document. Both of these need to be signed in the presence of a solicitor. The gift letter again is returned to the bank and the funds need to be transferred into an Irish bank account. 

Interview with David Sweeney

David Sweeney is the Principal Solicitor and founder of Sweeney Solicitors. Sweeney Solicitors are a property conveyancing law firm with offices in Cork, Dublin and Limerick city centres. You can learn more about the process of purchasing a home in David’s free e-book, “Scaling the Property Mountain“. 

Once you have an idea of your mortgage, I would advise contacting a solicitor at the very outset for a couple of reasons. Firstly, there’s no harm in shopping around and contacting two or three solicitors. At the end of the day, solicitors are businesses and their prices are competitive, so you should get the best value for yourself. Early engagement with a solicitor will also help you to work out your budget as you can factor the legal costs into your overall budget. 

The legal costs associated with buying a home can be significant as there are several elements to consider. 

Firstly, there is the legal fee you pay to the solicitor for carrying out the professional work. The legal fee can be anywhere between €1500 – 1900 plus VAT. Arrange a meeting with a solicitor on Zoom or by phone. Having talked to you, the solicitor should be able to gauge what the transaction is and give you a fixed price quote. This means that the price won’t change from the day you get your quote until the day the transaction process ends. 

If your offer on a property is accepted, you will need to pay a booking deposit to the estate agent. The booking deposit secures your interest in the property. However, if you change your mind at any point before you sign contracts, that money is fully refundable. This usually comes in around €5K. 

You will also need to pay Stamp Duty to the government. For Stamp Duty, the Revenue Commissioners charge 1%. So if you’re buying a house for €200- 300K, your Stamp Duty would be €3K. Stamp Duty is incorporated into your professional services legal bill because the solicitor pays the Stamp Duty for you. So you pay that money to your solicitor, they hold it in their client accounts and then once the transaction is complete they’ll pay the 1% on your behalf online. 

Another key element is what we call Third Party Outlay. So this is your fee to register your interest with the Land Registry. When you buy a house from somebody, there is already a  registered owner. The solicitor makes an application on your behalf with the Land Registry to take the old owner off the property and to register you as the new owner. This typically costs about €700 for properties between €201-400K. 

If you have a mortgage, when we pay over by the house with the vendors. We would pay over the balance purchase sums, if there’s a mortgage on that property. The vendor’s solicitors use those sums to pay off the remainder of the existing mortgage and that bank issues a vacated charge which takes the mortgage off the land registry. For example, if the new purchaser is using a BOI mortgage we would register that mortgage then against the property as a charge so that’s about €175. 

On the day you get your keys, the solicitor then carries out what we call Searches. So we would search all parties in the transaction – vendors, purchasers – for judging the bankruptcy and then we search the property itself in case there are any last-minute charges or loans put on the property that no one knows about. Depending on what is found, Searches can cost anything from €80 – 120. 

There’s usually another €100 in assorted charges. For example, same-day bank transfer fees cost €25. There’s the Commissioner for Oaths whose fee may cost €40. At the end of the process, the solicitor must make up a Folio at the end, and the price of this can vary from €5-25. 

Let’s say you’re buying a house for €300K. The stamp duty would cost €3K and your outlays may come in around €1000-1100. Then you need to factor in a Legal Fee of about €2K plus VAT. So the total figure for the professional fees would come to €6K. 

It depends on the type of purchase you are making. 

If it’s a second-hand house, it generally takes six weeks from the day you put down your booking deposit to the day you get your keys. However, this depends on a few factors like whether you have your loan pre-approval and your principal approvals all arranged. 

With new-builds, it typically takes about ten months to complete the build. So, if you go sale agreed at the start of the year then you will generally get your keys in October-November.

If the property is sold for probate, the process can be quite slow as you must wait for a Grant of Probate to be issued before the house can be sold. You can’t sell the house until you get the grant because the Probate Court needs to first permit the house to be sold through the probate system. Sometimes you could be looking at a year’s wait before the grant is issued. 

The best advice I can give is to find a good engineer who will do a thorough property survey. 

If you’re buying a new-build, you’re entitled to snag the property when the developer says the house is finished. This involves getting an engineer or a builder to walk through the house and they come up with a snag list. A ‘snag’ describes any faults that need to be fixed.  This list could include anything between 20 to 200 items. You then give this list to the developer and they must address all of the snags, they hand it back and once you’re happy that all the snags are complete, then you can draw down the funds and go to closing. 

If you’re purchasing a second-hand property, you need to arrange a Structural Survey. This can be done once you’ve gone sale agreed and handed over the booking deposit to the auctioneer. For this, you hire an engineer to do a walk-through of the house and provide a report. This can cost anywhere between €300 – 600, but it’s well worth the expense.  If the Engineer’s Report includes a few items, then there are three ways in which the seller can respond:  

  1. They agree to fix the problem  
  2. They won’t fix the problem, but they will deduct the cost of repairs from the purchase price 
  3. They say: “It is what it is, take it or leave it” 

As the purchaser, you need to then decide how you want to proceed.

I was listening to a radio show the other day where an auctioneer and a property expert were predicting another property boom. They were saying that back in 2020 many people thought that the property market was going to crash as there were no viewings, construction had halted, and there was a lot of uncertainty. However, during that period when the country opened up again, the property market went through the roof. There were a few reasons for this, people’s savings had built up and lots of people wanted to move out of their parents’ houses… I think right now people are unsure which way it’s going to go but I get the impression that the auctioneers are expecting a huge spike again. 

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