Stress Test for Interest Rate Hike - Flexibility?

Hello, I'm seeking to move house and increase the value of my mortgage. I have spoken with a number of lenders and seem to fit the criteria fine - to a point. LVR is fine; Income multiplier ratio is fine; Credit Rating is fine; Affordability is fine, even when some short term debt is factored in. Where I fall down is on proof of savings to meet the stress test requirement. Currently, I pay €2k per/m. The new mortgage would be €2.5k. And if rates rose by 2%, it would be €3,200. So the bank wants evidence of six months savings, whereby I've lodged €1200 to an account. I don't have that evidence. Will the banks make any exceptions here? I can start now, but it's frustrating to defer move for six months.

Assuming the answer to the above is no, I am (now) in a position to allocate about €1250 per/m. Should I overpay my mortgage by €1250 per/m or pay down the short term debt? Obviously the short term debt carries more interest. On the other hand, if I pay down mortgage, looks good for mortgage lenders in terms of stress test, plus I'll have knocked €7,500 off the capital sum in six months so my mortgage will be less/ LVR better?

Really grateful for any advice or experience in terms of how banks treat this.

Thanks very much.

You have to look at the interest rates on each loan and overpay whichever is the highest. Reducing or getting rid of short-term debt entirely will improve your mortgage affordability. Unless the short-term debt is interest free or very low interest I can't see how this could make any sense.

Hi Emma

When you say you don't have that evidence, what do you mean, exactly? That you have not been saving €1,200 a month?

If you can just about afford €2,000 a month now, why do you expect to be able to pay €3,200 a month when interest rates rise?

The lending criteria actually serve to protect you from borrowing too much and getting into difficulty. If you have expensive short term debt and are just about getting by, then you should reconsider trading up.

Brendan

Thank you both very much for replying.
Yes, I mean I have not been saving €1200 a month. My net weekly income has increased this year by about €400 per week; that is disposable income (that I've disposed of very effectively ) that could otherwise be used to pay down my mortgage/ pay for a higher mortgage, should the rates rise.
I've held a mortgage for about 15 years, have never missed a payment and expect to have about €170k equity when I sell. I'm looking for a mortgage around €450k.

The short term debt I have includes a CC and personal loans; there is no question but that it is at a higher interest rate than my mortgage.

My question is really if the banks need to see a surplus of €1200 per/m, will they factor in eliminating short term debt over 6 months as evidence of this, or would they prefer to see a mortgage overpayment?

Thanks again.

Emma36 said:

My question is really if the banks need to see a surplus of €1200 per/m, will they factor in eliminating short term debt over 6 months

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I think that this should be your priority and that they would see this as evidence of savings.

Brendan

Thanks very much; appreciated.