Scandalous rise in the cost of an overdraft

QWe are prospective first-time buyers who were concerned to hear that we would need a 20% deposit from next year. Now, apparently, some kind of insurance scheme is being mooted. How would this work? How much would it cost? And what is likely to happen?

AThe 20% deposit requirement and the insurance scheme are not mutually exclusive. In fact, they could work together, hand in hand.

A mortgage indemnity bond used to be a standard requirement for home loans. It insured the lender for any losses on the portion of loan above a ‘safe’ loan-tovalue (LTV) ratio – ie 80%.

The difference between that and what most first-time buyers want to borrow (90%) is one tenth of the property value.

This is the critical portion of the loan, the bit that lenders are likely to lose in a downturn, that the Central Bank proposes could be insured. So how much would it cost? Indemnity bonds used to cost around 3% of the LTV ‘gap’.

Three quarters of the indemnity bond cost would go to an insurer (with little likelihood of ever having to pay out a claim). Meanwhile, the banks will pocket a nice commission of around 25% (€150). The bond won’t do borrowers any good at all (it’s the bank’s potential losses that are being insured). But they are the ones who will have to pay for it.

However, I’m sure most firsttime buyers would rather cough up the €600 if it meant not having to save an extra 10% deposit. Central Bank governor Patrick Honohan suggested such a scheme last week. He also said he was worried that if the scheme were used too widely, it would neutralise the effect of the bank’s tough new measures to dampen down the property market.

But, critically, he said this would be less of a concern if it applied to first-time buyers only. So, reading between the lines, it seems that the scheme would be restricted to first-time buyers.

With this proposal, the bank could have its cake and eat it. It could effectively stick to its guns on the 80% LTV ratio.

But the ensuing furore would be defused by allowing first-time buyers to use insurance to bridge the gap between that and the nowusual 90% loans. The cost would be met by first-time buyers and banks and insurers would make a tidy profit.

Are indemnity bonds what the Central Bank had in mind all along? It proposed an unpopular plan to restrict mortgages, waited for the ensuing furore and then suggested a ‘surprise’ solution that has met with a positive response. Would this solution – an expensive insurance bond paid for by first-time buyers – have been greeted so warmly had it been suggested in any other context? I doubt it.

The Central Bank is also being very clever by making its proposals in a ‘discussion document’ and inviting contributions from interested parties.

It is seen to be inclusive and democratic, while still calling the shots with no obligation to take any of the suggestions on board.

The galling thing about all this is that indemnity bonds are designed to insure banks against a property crash.

Yet guess when they stopped using them? In the early 2000s, just before the worst property downturn in history.

Now they want to bring them back at a heavy cost to first-time buyers, just when property has started going like gangbusters.

You can email your say on the Central Bank’s new proposals to realestate@centralbank.ie before December 8.

The new proposals can be found on the website centralbank.ie.