Mortgage stress test - 6.5% interest, NDI or LTI the big factor?

flashforward

Hi All,

Trying to get my head around the following, maybe someone here can clarify:

The new bank lending rules lowered the loan to income down to 3.5x salary. This is the basic calculator used to determine how much you could borrow...

From some digging it appears to me that the most important factor is the applicants NDI (Net Disposable Income), the underwriters will only lend up to the point where the monthly repayments are between 25% and 40% of the applicant’s net disposable income.

Looking at a FTB example:
Couple earn a combined €100,000 per year
Per traditional calculators they can borrow up to €350,000 provided they have €35,000 in savings and enough money left over to pay for stamp duty and solicitor fees, survey etc.

Using the NDI rules:
Same couple take home net €5000 per month
Using a 35% limit on NDI the couple can afford a €1750 a month mortgage
With current interest rates (~3.7%) that mortgage will cost €1600 per month.
Great!

But where I'm seeing things get difficult is when the underwriters stress test this.

Allowing for a 2% rise in interest rates the new stress tested monthly payment is €2000 on the same mortgage.

Working backwards on the 5.6% interest rate the max mortgage the couple can get is €305,000 through NDI rules.

Am I right in saying this?
Surely all mortgage calculators should be based on NDI, not Loan to income? Or is 2% to high a stress test for the NDI rules?

Yourself isit

flashforward wrote: »

Hi All,

Trying to get my head around the following, maybe someone here can clarify:

The new bank lending rules lowered the loan to income down to 3.5x salary. This is the basic calculator used to determine how much you could borrow...

From some digging it appears to me that the most important factor is the applicants NDI (Net Disposable Income), the underwriters will only lend up to the point where the monthly repayments are between 25% and 40% of the applicant’s net disposable income.

Looking at a FTB example:
Couple earn a combined €100,000 per year
Per traditional calculators they can borrow up to €350,000 provided they have €35,000 in savings and enough money left over to pay for stamp duty and solicitor fees, survey etc.

Using the NDI rules:
Same couple take home net €5000 per month
Using a 35% limit on NDI the couple can afford a €1750 a month mortgage
With current interest rates (~3.7%) that mortgage will cost €1600 per month.
Great!

But where I'm seeing things get difficult is when the underwriters stress test this.

Allowing for a 2% rise in interest rates the new stress tested monthly payment is €2000 on the same mortgage.

Working backwards on the 5.6% interest rate the max mortgage the couple can get is €305,000 through NDI rules.

Am I right in saying this?
Surely all mortgage calculators should be based on NDI, not Loan to income? Or is 2% to high a stress test for the NDI rules?

I think 5,000 is far too low for 100,000 joint salary which negates the rest of your calculations.

Yourself isit

It's 5,320. That would mean that the 5.6% cost of 2k would be 37% of the salary.

In any case given that retail rates are way higher than the central bank rates now there's some leeway to not pass those rate increases onto customers - the banks will start making real money from tracker mortgages.