Effect of pension contributions on mortgage application?

VonLuck

Firstly I hope I'm correct in posting this here. I tried the mortgage thread but it went unnoticed!

My situation is that I am considering applying for mortgage approval. My questions relate to the effect a pension has on any application for a mortgage. I have enough saved for a deposit and have an ability to pay back a mortgage when my rental expenditure and current level of savings are added together (even when stress tested). I am now considering changing my saving for a deposit to saving for retirement.

Say hypothetically I earned €40k a year and I made Annual Voluntary Contributions (AVCs) of 10% per month, does this reduce my overall salary for the banks calculations for 3.5 times your salary i.e. instead of 3.5x€40k they would calculate it based on 3.5x€36k?

Another thing I wasn't sure on is if my payments into a pension fund are considered in their calculations for my ability to repay a mortgage. Let's say ,again hypothetically, that I am making AVCs of 10% of my gross meaning my take home pay is lower than it is currently (obviously). Do banks see this as an ability to save and thus a positive when doing their stress tests i.e. equivalent to putting this money into a savings account as I am doing at the moment? My concern is that they will see pension contributions as an "expense" akin to a loan and exclude this as a form of savings.

One final question, which I think I know the answer to - does an employer's contribution to a pension have any effect on a mortgage application, either positively or negatively?

davo10

Banks typically take into account earnings and disposable income, will you be able to make mortgage repayments. They also do a type of stress test based on your monthly outgoings and effect of a +1% increase on interest rates. When applying for a mortgage, you have to make your ability to make repayments look the best they can be. Hold off pension contributions until you get the mortgage, then start paying into it, you are only talking about a delay of a couple of months so in the long term it won't make too much of a difference to your pension.

The term of a mortgage won't go beyond retirement age so they will not consider your pension as a means of making repayments. Pensions value can go down so they are not a solid indicator of your ability to repay a mortgage after you retire.

VonLuck

davo10 wrote: »

Banks typically take into account earnings and disposable income, will you be able to make mortgage repayments. They also do a type of stress test based on your monthly outgoings and effect of a +1% increase on interest rates. When applying for a mortgage, you have to make your ability to make repayments look the best they can be. Hold off pension contributions until you get the mortgage, then start paying into it, you are only talking about a delay of a couple of months so in the long term it won't make too much of a difference to your pension.

The term of a mortgage won't go beyond retirement age so they will not consider your pension as a means of making repayments. Pensions value can go down so they are not a solid indicator of your ability to repay a mortgage after you retire.

Thanks for the reply. I would not like to delay paying into my pension as I'm not certain what the next few months will bring. I may or may not apply for the mortgage within 6 months. Holding off on increasing my pension payments could end up becoming a year, and as you know, the earlier you start your pension the better.

My thinking on pension contributions is that these are entirely voluntary, such as putting money into a savings account. If my mortgage repayments had to increase, I would reduce my pension contributions. The same way if I was putting this money into a savings account, I would decrease the amount and put it towards the repayments.

Are you saying that banks don't see it this way?

bikeman1

Don't forget you have right up until the ROS online filing deadline to pay into your pension as an additional contribution. So you have until approximately the 10th of November 2019 to pay into your 2018 pension and get full tax relief.

I did this for 2017 when getting my mortgage. Put my "pension payments" into a savings account. Which counted as a deposit and part of ability to pay.

Then after I got my mortgage I was able to make a payment towards 2016's pension in November 2017. Now going to pay 2017 in 2018 along with re-commencing my monthly salary pension for 2018.

I would suggest you do something like that. It's about playing it sensible. Once it is in the pension it is likely to be locked away until the very end or after your mortgage is finished.

Alkers

For lti purposes it's your gross income that counts, so they're allowed lend you 3.5 times your salary regardless of your pension contributions. Then, the bank will gauge your repayment capability which will be affected by pension contributions as your spending power will be somewhat reduced. Most people's loan amount will be restricted by the lti ratio long before their repayment capacity comes into play unless you're applying for a shorter mortgage term.

shopper2011

Simona1986 wrote:

For lti purposes it's your gross income that counts, so they're allowed lend you 3.5 times your salary regardless of your pension contributions.

This is not true. Banks are not allowed to include pension contributions for the benefit of mortgage. 3.5 excluding pension contributions.

GingerLily

shopper2011 wrote: »

This is not true. Banks are not allowed to include pension contributions for the benefit of mortgage. 3.5 excluding pension contributions.

Do you have any sources?

CeilingFly

shopper2011 wrote: »

This is not true. Banks are not allowed to include pension contributions for the benefit of mortgage. 3.5 excluding pension contributions.

Excluding employer contribution., not employee voluntary contribution.

Alkers

CeilingFly wrote:

Excluding employer contribution., not employee voluntary contribution.

And most people wouldnt include any employer contributions in their gross salary

CeilingFly

Simona1986 wrote: »

And most people wouldnt include any employer contributions in their gross salary

Some people are quoted "salary package". Banks just want to be clear that just gross salary is taken into account and not additions that make up a salary package

Remember, you can opt out of voluntary contributions

hmmm

I had to supply documentation which showed that AVCs were voluntary and could be stopped - the bank were happy with this.

Franz Von Peppercorn

Yeh. Banks don’t care about voluntary contributions. They can be stopped.

VonLuck

hmmm wrote: »

I had to supply documentation which showed that AVCs were voluntary and could be stopped - the bank were happy with this.

Franz Von Peppercorn wrote: »

Yeh. Banks don’t care about voluntary contributions. They can be stopped.

That's great to hear. Is this with all banks or does it vary depending on who you ask?

hmmm

VonLuck wrote: »

That's great to hear. Is this with all banks or does it vary depending on who you ask?

BOI and AIB were the two I asked. BOI gave me more hassle,they weren't sure what their policy was.