I just carried out a review of the mortgage lending market back in 2008 and ran some figures on the impact the proposed 20% deposit rules could have had on the market back then. What I was particularly interested in was the number of borrowers using mortgage credit in excess of 80%.
First, looking at the overall new homes market, some 63% of all loans granted and drawn down exceeded 80% in the Dublin area.
Nationally, the figure was a little lower at 52%, perhaps borrowers were a little more prudent or lenders more cautious?
Examining the second-hand property market in Dublin, the percentage of loans greater than 80% LTV was 56% while across the entire country, the figure drops to 50%. Second hand homes incurred a significant stamp duty liability and so, were often avoided by first time buyers. Lenders reserved 100% finance for first time buyers only.
What is interesting about the overall mortgage statistics is when I look at first time buyer market in Dublin between 2004 and 2008, almost 9 in 10 mortgages (87%) had LTV’s that exceeded 80%.
The proposals on restrictive lending put forward by the Central Bank today are interesting, especially the 20% deposit.
One area it has not identified for reform is the actual loan terms such as loans that exceed 30 years in duration. As I teach students in my MoneyWhizz financial education classes, the longer one holds a debt, the less costly it appears to be but the more cost it actually is. This is a function of the time cost of money.
I believe that no mortgage should exceed 30 years as such loans create extraordinary artificial affordability and significantly increase the cost of credit to consumers through higher interest charges.
My main concern with the proposed 20% deposit rules is they may restrict the financially prudent, especially those whose mortgage repayments may actually be lower than their monthly rents.
However, while the direction that the Central Bank is now taking is the right one, it could go further in some areas. The stability of the banks must be weighed equally against the stability of consumers.
Frank Conway is the Founder of MoneyWhizz, the financial education and personal budgeting resource.