Don't pay a big deposit? Then you'll just pay more…

Don't pay a big deposit? Then you'll just pay more…

Having a large deposit can significantly help your chances of getting a house

People are fixated with property prices, the wide coverage of the CSO property price index is in clear contrast to how little people track bank mortgage rate changes (although we are also fixated on ECB interest rate changes). The cost of something is different than the price of something, sadly we tend to look at prices and disregard costs far too often.

In that respect we are seeing a two tier mortgage market develop, where costs will vary not depending on your ability to repay the loan, but more so on how large a deposit you pay. There are reasons for this – for a start, the bank prefer lower risk business, the more equity you have (your deposit) the less they have to worry if prices drop or you stop paying.

This is because any loss always eats through the borrowers’ equity first, not the banks loan on the property. This is achieved by holding the ‘first lien’ or right to the property, meaning that in any sale the bank gets their money before the owner does.

Take a look at the difference, on a €200,000 loan in two examples, where the gross loan is the same but the actual security position of the property is different (one is where the €200,000 represents a 90%-92% loan, the other is where this represents 50% or less).

Mortgage rates based on LTV

You see that it can make a cost difference of €14,400 to €41,760 over the life of the loan! Bearing in mind that this is the same amount of money lent, the only difference being the ‘risk’ the bank perceive by the loan versus the value (LTV) being high.

That is part of the reason that 100% mortgages were such a bad idea for banks, even if prices fell 2% they were the ones carrying the can, the borrower carries a debt, but the maximum risk is on the lender when a loss is realised. Granted, they can get judgements and such against a borrower but that is a secondary issue if you have to support that risk up front as a bank does.

So when you hear ‘banks are not lending’ – and don’t just take the catastrophic reduction in credit advancements from the banks themselves as the only evidence – it is generally being mentioned in relation to regular borrowers who don’t have a 50% deposit, because the moneyed up people with large deposits don’t have an issue getting credit.

That they are in a minority is a given, but there are still people in that category and the banks do like to deal with them and also offer preferential pricing because of it.

With any luck we won’t go the route the UK has where depending on your deposit it could be as much as twice the price! The Capital Adequacy rules are being blamed there. It is true that mortgages require a higher capital adequacy (than government bonds for instance which require none for the most part), but that doesn’t explain away a full doubling of the relevant rate!

If we thought our banks were out there to gouge, just be thankful we don’t have the situation they do across the water!

@karldeeter

Irish Mortgage Brokers

There are 4 comments for this article
  1. Unpredictor at 12:17 pm

    Does the 0.5% increase in AIB rates apply across the board? i.e. does it affect the LTV rates (50% 80%) too?

  2. Linda Long at 10:53 am

    Contrary to what you have written, I only needed €50,000 mortgage as I was putting up €250,000 from the sale of my home.We are both in our late 30’s, both work in good jobs,very little out-goings and It took us 3 months to get the loan, they then gave us 3 months to sell our home and put a deposit on a new one, we were sale agreed within 2 weeks but finding our dream home proved impossible with such a short supply for sale. We were forced to back out after we tried in vain to secure another 3 months with out having to re-apply all over again. I was dealing with AIB.

  3. Liam Keaveney at 10:45 am

    When borrowing money from any instition,it is a good idea to pay as big a deposit as possible upfront because this is like getting the same rate of interest on your deposit as you’re paying for your loan.How? If you borrow €100000 @3%, you pay €3000 in interest,but if you pay €10000 deposit and borrow €90000@3% you pay €2700 in interest thus saving €300 which you could say your €10000 earned in interest.

  4. Karl Deeter Author at 10:32 am

    And hot on the trail of this AIB have just announced that they will be increasing their SVR rate by 50bps! We have been saying for some time that they are pricing at a loss, but this news will come as quite a shock to people because now AIB have not passed on a rate cut and jacked up rates a full half percent (probably to make ground on rate increases they didn’t pass on in the past).

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