Mortgage -Stress Testing

[NY_Resident]

Hi all

I’m in the process of applying for a mortgage (movers). Wondering if anybody knows the answer to the questions below. I think I may be in a position where the stress test limits may impact the max loan made available; understanding this better would be helpful in deciding whether or not I should liquidate some other assets in order to fund the purchase in advance of selling my existing home:

1. I contribute the maximum possible under Revenue rules to my company’s pension plan (which is voluntary membership). If I run up against limits on the stress test, do mortgage underwriters generally make allowance for the fact that I can substantially increase net monthly income by reducing my pension contributions (I have outlined this in my application). Bank is AIB

2. AIB make allowance for approx 50% of bonus received over last 3 years in arriving at max loan amount of 3.5x salary. Do they also take this bonus income into account at the same level in the stress test?

3.Does anybody know what allowance AIB makes for stock option income in the 3.5x salary. Same treatment as bonus, or excluded?

4. I also have a mortgage on a rental property. It’s a fixed rate with about 8 years remaining. For stress test, does anybody know if AIB assumes no impact of+2% rise in rates on this repayment?

Thanks for any help!

 

[RedOnion]

Do they also take this bonus income into account

No, I don't believe they (or any bank) do. There are a few scenarios where RSUs are taken into account, but I haven't seen any with share options.

4. I also have a mortgage on a rental property. It’s a fixed rate with about 8 years remaining. For stress test, does anybody know if AIB assumes no impact of+2% rise in rates on this repayment?

No, they won't stress a rate increase, but they only take about 75% of the income into account. If at that point it's cashflow negative it'll weigh on the amount you can borrow.

1. I contribute the maximum possible under Revenue rules to my company’s pension plan (which is voluntary membership). If I run up against limits on the stress test,

If this is a problem, reduce your contribution to the minimum required to get any matching employer contribution. That'll increase your net monthly pay. Then after you draw down mortgage, but in a lump sum to make up the difference. You have until October the following year to do it and be able to claim tax relief.

You'd probably benefit from using a mortgage broker if there's anything unusual about you scenario. And if there's specific reason for choosing AIB?

 

[misemoi]

Not the same bank, but Ulster bank indicated to me they would ignore the AVCs if required for our application as we could stop them at any time.

 

[NY_Resident]

No, I don't believe they (or any bank) do. There are a few scenarios where RSUs are taken into account, but I haven't seen any with share options.


No, they won't stress a rate increase, but they only take about 75% of the income into account. If at that point it's cashflow negative it'll weigh on the amount you can borrow.


If this is a problem, reduce your contribution to the minimum required to get any matching employer contribution. That'll increase your net monthly pay. Then after you draw down mortgage, but in a lump sum to make up the difference. You have until October the following year to do it and be able to claim tax relief.

You'd probably benefit from using a mortgage broker if there's anything unusual about you scenario. And if there's specific reason for choosing AIB?

Thanks RedOnion - that's very helpful. I would consider reducing pension contributions, but i would loose the employer match which is very significant (e'r of up to 20% of base). I'll get a letter from HR outlining that pension contributions can be reduced to zero, and see if that helps.

Re broker - yes, will prob do. I'm not too interest rate sensitive as net proceeds from home sale + funds should allow me to prepay most/all of the new mortgage within 3-6 months. Main short-term priority was to get into position of strength with AIP and also know what parameters I may need to work within as I'm about to get into the heat of negotiation! Kicking it off with current main bank got me there quicker....but will now consider broker option to make sure i get optimal terms.

 

[NY_Resident]

Not the same bank, but Ulster bank indicated to me they would ignore the AVCs if required for our application as we could stop them at any time.

Thanks misemoi - good to hear that at least one bank applies some common sense!

 

[NY_Resident]

No, I don't believe they (or any bank) do. There are a few scenarios where RSUs are taken into account, but I haven't seen any with share options.


No, they won't stress a rate increase, but they only take about 75% of the income into account. If at that point it's cashflow negative it'll weigh on the amount you can borrow.


If this is a problem, reduce your contribution to the minimum required to get any matching employer contribution. That'll increase your net monthly pay. Then after you draw down mortgage, but in a lump sum to make up the difference. You have until October the following year to do it and be able to claim tax relief.

You'd probably benefit from using a mortgage broker if there's anything unusual about you scenario. And if there's specific reason for choosing AIB?

Just one point of clarification RedOnion - my understanding of your response is that you are not aware of any banks who take account of average stock option income exercised and realised in the arriving at "Salary" for the purposes of applying the 3.5 factor? Is my understanding correct? Thanks

 

[RedOnion]

Just one point of clarification RedOnion - my understanding of your response is that you are not aware of any banks who take account of average stock option income exercised and realised in the arriving at "Salary" for the purposes of applying the 3.5 factor? Is my understanding correct? Thanks

Yes, that's my understanding. Assuming it's options and not RSU.
Options only have a value if the share price is above the option strike price.

I'll get a letter from HR outlining that pension contributions can be reduced to zero, and see if that helps.

It's usually clear enough on payslip that it's an AVC. I know on my own there are 3 figures: Core contribution, matched AVC, and AVC.

 

[NY_Resident]

Yes, that's my understanding. Assuming it's options and not RSU.
Options only have a value if the share price is above the option strike price.


It's usually clear enough on payslip that it's an AVC. I know on my own there are 3 figures: Core contribution, matched AVC, and AVC.

It's actually PSUs, but delivered via nominal cost options i.e., options to buy a share at a strike price close to zero (so options value behaves exactly the same as underlying share value as payoff curve is the same). So in reality, they are similar to RSUs but with company performance conditions attached. Just writing this sentence makes me assume that no bank is going to dig into this enough to feel comfortable including!

 

[RedOnion]

Ah, it depends on who your employer is really. AIB and BOI are the only banks considering these at the moment, and they do look at them on a case by case basis. I think they might consider up to 50% of the average over last 2 or 3 years, but it'll depend on the specifics.
Ulster Bank seem to have temporarily stopped including them.

 

[NY_Resident]

Another question here. Some more background first - I am a mover and am planning on waiting on going sale agreed before I put my own house on the market. I don’t need the equity to secure the new mortgage, and should be able to stretch the borrowed amount to cover the purchase. In reality, I plan on paying off 75% of the new mortgage once I have sold my own house. Only concern I have is that the stress test may slightly curtail my purchasing power....enough to damage my ability to get through any bidding war.....though in reality this stress test is not a helpful indicator of capacity to repay given the pending sale and substantial mortgage clearance.

Would I be better off indicating that I intend to rent out my current home (thereby increasing my capacity to repay in a stress test) rather than stating that I intend to repay most of the mortgage? Seems a little perverse that being more indebted could be more beneficial in a stress test, but I don’t want to get curtailed by rules which don’t apply very well given the circumstances.

note: no mortgage on current home so I don’t need to worry about being switched to buy to let rates. Also, I am fully aware of the market risk re timing difference between house purchase and sale of current home!