In the aftermath of the 2008 financial crisis, Irish lenders and regulators have implemented stricter measures to ensure responsible lending practices. One crucial concept that has gained prominence is Demonstrated Repayment Ability (DRA). This article aims to explain DRA and its significance for Irish borrowers.

What is Demonstrated Repayment Ability (DRA)?

Demonstrated Repayment Ability refers to a borrower’s proven capacity to make regular mortgage payments based on their income and financial history. It’s a key factor that lenders consider when assessing mortgage applications.

How is DRA Calculated?

Irish lenders typically calculate DRA by examining:

1. Net monthly income

2. Existing loan repayments and financial commitments

3. Proposed mortgage repayments

4. Living expenses

Lenders will assess whether a borrower can comfortably meet their mortgage repayments along with other financial obligations.

 Why is DRA Important?

DRA serves several purposes:

• 1. Responsible Lending: It helps ensure that borrowers don’t take on more debt than they can handle.
• 2. Financial Stability: By reducing the risk of defaults, DRA contributes to the overall stability of the Irish housing market.

• 3. Consumer Protection: It safeguards borrowers from potential financial distress.

DRA and Central Bank Regulations

The Central Bank of Ireland has set clear guidelines on mortgage lending, including:

1. A loan-to-income (LTI) limit of 3.5 times gross annual income for most borrowers
2. Mandatory stress testing to ensure borrowers can handle potential interest rate increases

These regulations work alongside DRA assessments to create a comprehensive picture of a borrower’s financial capacity.

Tips for Irish Borrowers

To improve your DRA, consider:

1. Maintaining a stable income

2. Reducing existing debts

3. Saving consistently to demonstrate good financial management

4. Keeping accurate records of your income and expenses

IMPORTANT REMINDER: mortgage lenders take into account the past 6 months of financial history when assessing your DRA.

Final Thoughts 

Understanding DRA is crucial for anyone considering a mortgage in Ireland. By demonstrating a strong repayment ability, you not only increase your chances of mortgage approval but also ensure that you’re taking on a financial commitment you can sustainably manage.

Remember, while DRA is important, it’s just one part of the mortgage application process. Always consult with financial advisors and multiple lenders to find the best option for your circumstances.

When investing, understanding your risk tolerance is a critical step in building a portfolio that aligns with your financial goals and comfort level. As financial advisors, we often find that risk tolerance is both misunderstood and underestimated, yet it plays a central role in determining your investment strategy. Whether you’re saving for retirement, a child’s education, or a dream home, knowing your risk tolerance can make the journey smoother and more predictable.

What Is Risk Tolerance?

Risk tolerance is the degree of variability in investment returns an individual is willing to withstand. It’s a measure of how much market volatility, and potential loss, you can handle without losing sleep or abandoning your investment plan. Understanding this concept helps to ensure that your investment portfolio matches your ability and willingness to take on risk.

Understanding your risk tolerance is vital because it helps:

• Determine appropriate asset allocation within the markets
• Prevent emotional decision-making during market volatility, such as during economic downturns or global events affecting the Irish economy
• Ensure you don’t start panicking, even when markets are turbulent

Remember, there’s no “right” or “wrong” risk tolerance. The key is to align your investment strategy with your personal risk tolerance to create a sustainable, long-term financial plan that works within the Irish financial landscape.

Factors Influencing Risk Tolerance

1. Time Horizon: The length of time you plan to invest before needing access to your money is one of the biggest determinants of your risk tolerance. Generally, the longer your time horizon, the more risk you can afford to take. For instance, if you’re in your 30s and saving for retirement, you might have 30+ years to ride out market fluctuations. In contrast, if you’re planning to buy a house in five years, your risk tolerance should be lower, as you’ll need the funds in the near term.
2. Financial Situation: Your current financial situation, including your income, savings, and expenses, significantly affects your risk tolerance. Someone with a steady income, a solid emergency fund, and minimal debt can generally afford to take on more risk than someone with an unstable income or high financial obligations.
3. Investment Experience and Knowledge: Your familiarity with investing and the markets also influences how much risk you’re comfortable with. Seasoned investors often have a higher risk tolerance because they understand market cycles and are less likely to panic during downturns.
4. Personal Attitude Toward Risk: Two people might have very different risk tolerances even with similar financial situations. Some individuals are naturally more risk-averse, preferring the security of lower, more predictable returns, while others might be more comfortable with the ups and downs of the market.

Assessing Your Risk Tolerance

To determine your risk tolerance, it’s essential to ask yourself some key questions:

• How would you react if your investment portfolio dropped 20% in value?
• Are you more concerned with preserving your capital or achieving higher returns?
• How much of your overall wealth are you willing to put at risk?

Financial advisors often use questionnaires or tools to gauge risk tolerance, helping to categorise investors as conservative, moderate, or aggressive. It’s important to be honest during this assessment—overestimating your risk tolerance can lead to stress and poor decisions during market downturns.

Aligning Investments with Risk Tolerance

Once you’ve identified your risk tolerance, the next step is to align your investments accordingly. A conservative investor might prefer a portfolio weighted heavily towards bonds, cash, and other low-risk assets. In contrast, an aggressive investor might lean towards stocks, real estate, and other high-risk investments.

Diversification is another crucial strategy, regardless of your risk tolerance. By spreading investments across different asset classes and geographic regions, you can reduce the overall risk in your portfolio while still aiming for growth.

Risk Tolerance in an Irish Context

For Irish investors, considering the local and European economic landscape is crucial. Ireland’s economy, heavily influenced by its ties to both the EU and global markets, means that international factors often affect domestic investments. The importance of diversification cannot be overstated in such a small, open economy.

Additionally, Irish investors should know the tax implications of different investments. Some products, like certain life insurance policies and pensions, offer tax benefits that can make them attractive depending on your risk tolerance and financial goals.

Reviewing Your Risk Tolerance Regularly

Risk tolerance isn’t static—it evolves as your financial situation, goals, and market conditions change. Regular reviews with your financial advisor are essential to ensure that your investment strategy remains aligned with your current risk tolerance.

Final Words 

Understanding your risk tolerance is the foundation of a sound investment strategy. By considering your time horizon, financial situation, experience, and personal comfort with risk, you can build a portfolio that not only helps you reach your financial goals but also lets you sleep well at night. As your advisor, our goal is to help you navigate this journey with confidence, ensuring that your investments are always in tune with your risk tolerance.

Whether you’re just starting or revisiting your investment plan, taking the time to assess your risk tolerance is a wise step toward financial success in today’s unpredictable world.

Suggested Further Reading:

Guide to Financial Planning for Beginners

Financial Mistakes to Avoid

Guide to Financial Planning for Beginners

Financial planning might seem daunting, especially if you’re just starting out on your financial journey. However, it’s an essential skill that can help you achieve your life goals, whether they’re short-term goals like saving for a holiday, medium-term objectives like buying a home, or long-term plans such as preparing for a comfortable retirement. By taking control of your finances early, you’re setting yourself up for a more secure and prosperous future. This comprehensive guide offers practical advice to help you navigate the world of personal finance and get started on your path to financial well-being.

Understanding Financial Planning Basics

Before diving into the specifics, it’s crucial to grasp what financial planning entails. At its core, financial planning is the process of setting financial goals, creating a roadmap to achieve those goals, and regularly reviewing and adjusting your plan as your life circumstances evolve. It’s not a one-time activity but an ongoing process that adapts to your changing needs and financial situation.

The core areas of financial planning include:

• Budgeting: This involves tracking and managing your income and expenses. It’s the foundation of all financial planning, as it helps you understand where your money is going and identifies areas where you can potentially save more.
• Saving: Setting aside a portion of your income for both short-term and long-term goals is crucial. This could range from building an emergency fund to saving for major life events.
• Investing: This involves putting your money to work to potentially grow your wealth over time. Investing can help you outpace inflation and build substantial wealth in the long run.
• Retirement Planning: Ensuring you have enough income to maintain your desired lifestyle in your later years is a critical aspect of financial planning. The earlier you start, the more time your money has to grow.
• Tax Planning: Understanding how to minimise your tax liabilities legally can help you keep more of your hard-earned money.
• Insurance: Protecting yourself and your assets against unforeseen circumstances is an often overlooked but vital part of financial planning.

Budgeting Tools and Techniques

Creating and adhering to a budget is the cornerstone of effective financial management. It provides a clear picture of your financial health and helps you make informed decisions about spending and saving. While the idea of budgeting might seem restrictive, think of it as a tool that gives you control over your money, rather than the other way around.

There are numerous online tools and smartphone apps available that can help you track your income and expenses effortlessly. When choosing a budgeting tool, look for features such as:

• The ability to link multiple bank accounts and credit cards
• Automatic categorisation of expenses
• Goal-setting capabilities
• Visual representations of your spending patterns
• The option to set alerts for bill payments or when you’re approaching spending limits

Remember, the best budgeting method is one that you can stick to consistently. Some people prefer the detailed tracking that digital tools provide, while others might opt for simpler methods like the envelope system or the 50/30/20 rule (50% needs, 30% wants, 20% savings and debt repayment).

Saving and Investment Options

Once you have a solid grasp on your budget and have identified areas where you can cut back on spending, it’s time to focus on saving and investing. The difference between saving and investing is important to understand:

Saving typically refers to setting aside money in low-risk, easily accessible accounts. This is ideal for short-term goals and emergency funds.

Investing, on the other hand, involves putting your money into assets that have the potential to grow in value over time, such as stocks, bonds, mutual funds, or real estate. While investing comes with more risk, it also offers the potential for higher returns, especially over longer periods.

When developing your saving and investment strategy, consider:

• Your financial goals and time horizon
• Your risk tolerance
• Diversification to spread risk
• The power of compound interest
• The impact of fees on your returns

It’s often beneficial to work with financial professionals who can help you create a diversified portfolio aligned with your risk tolerance and financial objectives. They can also help you understand complex financial products and stay updated on market trends.

Retirement Planning

While retirement might seem like a distant concern, especially for younger individuals, it’s never too early to start planning. The power of compound interest means that even small contributions made early in your career can grow significantly over time.

When thinking about retirement planning:

• Understand the different types of retirement accounts available such as employer-sponsored plans and individual retirement accounts.
• Consider how much you’ll need in retirement based on your desired lifestyle.
• Learn about the impact of inflation on your retirement savings.
• Explore strategies for maximising your retirement contributions.
• Understand how your retirement savings are taxed.

Government resources and financial advisors can provide valuable information about various pension schemes and retirement accounts suitable for your situation.

Tax Planning

Understanding how taxes impact your financial situation is crucial for effective financial planning. While tax laws can be complex, having a basic understanding can help you make informed decisions and potentially save money.

Key aspects of tax planning include:

• Understanding your tax bracket and how it affects your income
• Knowing which deductions and credits you’re eligible for
• Understanding the tax implications of your investments
• Planning for major life events that can affect your taxes, such as buying a home or starting a business
• Considering the timing of income and deductions

Familiarise yourself with Revenue.ie, which provides comprehensive resources for individual taxpayers. For more complex situations, consider consulting with a tax professional who can provide personalised advice.

Seeking Professional Financial Advice

While a wealth of financial information is available online, sometimes it’s beneficial to seek professional advice. As your financial advisor, we can provide personalised guidance based on your unique situation and help you navigate complex financial decisions.

Consider seeking professional advice when:

• You’re facing a major life change (marriage, divorce, new job, etc.)
• You’re struggling to meet your financial goals
• You’re ready to buy your first home 
• You’re dealing with complex investments or tax situations
• You’re planning for retirement
• You want to ensure you’re on the right track with your current financial plan

Final Thoughts

Financial planning is a journey, not a destination. It requires ongoing attention and adjustment as your life circumstances change. While it might seem overwhelming at first, remember that every step you take towards better financial management is a step towards a more secure future.

Start by mastering the basics: create a budget, build an emergency fund, and educate yourself about different financial concepts. As you become more comfortable, you can delve into more complex areas like investing and retirement planning.

Remember, there’s no one-size-fits-all approach to financial planning. What works for someone else might not be the best strategy for you. Be patient with yourself, celebrate small victories, and don’t be afraid to ask for help when you need it.

By taking control of your finances now, you’re setting yourself up for a lifetime of financial well-being. So take that first step today – your future self will thank you for it.

Your First Step:

Financial Advice

Shankill Financial Services: 01 2393220 | info@shankillfs.ie

Mortgage Advice 

Smart Mortgages: Tel: 01 239 3220 | hello@smartmortgages.ie

Suggested Further Reading

Top Financial Mistakes to Avoid

What Lenders DON’T Want to See 

Securing a mortgage in Ireland can sometimes feel like a convoluted process, and let’s be honest, a stressful one. Understanding what lenders consider “no-nos” can help not only improve your application but also shorten it and make it less nerve-wracking. Here are some key factors lenders don’t want to see:

1. Poor Credit History

Late Payments and Defaults

Lenders scrutinise your credit history for late payments or defaults. Keeping a clean record by paying bills on time is crucial. If you are not able to keep up with your monthly payments, be upfront with whoever the service provider is and discuss adjusting your monthly payments.

High Credit Utilisation

Using a large portion of your credit limit may suggest financial instability. Lenders want to see that you’re living within your means and will be well able to pay a mortgage each month. Aim to keep your credit utilisation below 30%.

2. High Debt-to-Income Ratio

A high debt-to-income (DTI) ratio means a significant part of your income goes towards debt repayment, leaving less for mortgage payments. Lenders typically prefer a DTI below 40%.

3. Unstable Employment History

Frequent Job Changes

Stability is key. Frequent changes in employment can raise concerns. Lenders prefer consistent employment within the same industry. We by no means suggest you stick at a job you hate or put your dreams on the long finger. What we would recommend is figuring out what your priorities are as changing jobs right in the middle of a mortgage application would be a messy business. Plus, you need to be in a permanent role for 6 months as far as the banks are concerned.

Gaps in Employment

Unexplained gaps between jobs may be a risk. Take this with a pinch of salt. This sentiment has come a long way in recent years. There are so many reasons you might have employment gaps; starting a family, travelling the world, illness etc (all of which are valid reasons). It is just something to be aware of, in case a lender questions it.

4. Insufficient Savings

Generally speaking, 10% of the purchase price is what is expected as a deposit. However,  a larger deposit reduces the lender’s risk, thus making you more favourable to a lender. With the cost of nearly everything skyrocketing, you can only do what you can and 10% is a sufficient saving in many/most cases.

5. Unverifiable Income

Lenders require verification through payslips, tax documents, or bank statements. Inconsistent or unverifiable income sources can complicate your application. Make your payment and income history as simple to dissect as possible!

6. Unresolved Financial Issues

Inaccurate Information

Providing conflicting details can harm your credibility. Ensure all information is accurate and consistent.

Outstanding Debts or *Liens

Unresolved debts or legal issues can impede your mortgage application process.

*A lien is a claim or legal right against assets that are typically used as collateral to satisfy a debt

7. Recent Large Purchases

Making significant purchases before applying for a mortgage can negatively impact your credit score and increase your DTI ratio. Lenders prefer financial stability. This is why planning as far ahead of your mortgage application as possible is best.

8. Excessive Credit Enquiries

Multiple credit inquiries in a short period can suggest financial stress and may lower your credit score.

9. Spending After Approval in Principle 

You have just received an approval in principle. You breathe a huge sigh of relief that you’re that much closer to your new home. However, you aren’t all the way there yet. It can be tempting to let your spending increase and your savings decrease at this milestone. It’s absolutely vital that you continue in the same vein as before until you draw down.

The bottom line 

Securing a mortgage requires careful preparation and understanding of what lenders prioritise. By avoiding common pitfalls such as poor credit history, high debt-to-income ratio, unstable employment, insufficient savings, unverifiable income, unresolved financial issues, recent large purchases, excessive credit inquiries, and overspending after approval, applicants can enhance their chances of success. Planning and maintaining financial discipline can significantly ease the stress of the mortgage application process and lead to a smoother path towards homeownership! For more advice on mortgage applications or to get started with us today; contact the Smart Mortgages team today: 01 2393220 | info@smartmortgages.ie

Making smart decisions is crucial for financial stability and growth. However, even the most financially savvy individuals can stumble. Here, we outline some common financial mistakes and practical advice on how to avoid them.

1. Neglecting to Plan for Retirement

The Mistake: Many delay or neglect planning for retirement, assuming it’s too far off to worry about now.

How to Avoid It: Start contributing to a pension fund as early as possible. The government offers tax relief on pension contributions, which can significantly boost your savings. Utilise employer pension schemes, and consider consulting a financial advisor to create a retirement plan tailored to your needs.

2. Over-reliance on Credit Cards

The Mistake: Credit cards can be convenient, but relying too heavily on them can lead to mounting debt and high interest payments.

How to Avoid It: Use credit cards responsibly by paying off the full balance each month to avoid interest charges. Create a budget to track your spending and stick to it. If you have existing credit card debt, focus on paying it down as quickly as possible, starting with the highest interest-rate cards.

3. Ignoring the Importance of an Emergency Fund

The Mistake: Life is unpredictable, and many Irish households are unprepared for unexpected expenses due to a lack of emergency savings.

How to Avoid It: Aim to save at least three to six months’ worth of living expenses in an easily accessible savings account. This fund will provide a financial cushion in case of emergencies such as job loss, medical issues, or urgent home repairs.

4. Failing to Invest

The Mistake: Some people refrain from investing because of a lack of knowledge or fear of losing money, missing out on the opportunity for their money to grow.

How to Avoid It: Educate yourself about different investment options. Consider speaking with a financial advisor who can guide you based on your risk tolerance and financial goals. Remember, investing is a long-term strategy that can significantly increase your wealth over time.

5. Not Taking Advantage of Tax Reliefs and Credits

The Mistake: Ireland offers various tax reliefs and credits that individuals often overlook, leading to higher tax payments than necessary.

How to Avoid It: Familiarise yourself with available tax reliefs and credits. Regularly review your tax situation and consult a tax professional to ensure you’re maximising your tax benefits.

6. Overlooking the Cost of Insurance

The Mistake: Under-insuring or over-insuring can both lead to financial strain. Many Irish residents neglect essential insurance or pay too much for unnecessary coverage.

How to Avoid It: Evaluate your insurance needs carefully. Ensure you have essential coverage, such as health, home, car, and life insurance, but avoid overlapping policies. Shop around and compare quotes annually to get the best rates. Don’t forget to review and update your coverage as your life circumstances change.

7. Failing to Seek Professional Financial Advice

The Mistake: Many people try to manage their finances without professional guidance, which can lead to suboptimal decisions and missed opportunities.

How to Avoid It: Consider hiring a financial advisor, especially when making significant financial decisions like buying a home, investing, or planning for retirement. A good advisor can provide personalised advice, help you set realistic goals, and create a comprehensive financial plan.

Conclusion

Avoiding these common financial mistakes can significantly improve your financial health and prospects. By planning for retirement early, using credit responsibly, building an emergency fund, investing wisely, maximizing tax benefits, carefully managing insurance, and seeking professional advice, you can achieve greater financial stability and security. Remember, the key is to be proactive and informed about your financial decisions.

Get in touch with Shankill Financial Services today: info@shankillfs.ie or 01 239 3220