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New deposit rules will 'lock out' many potential buyers

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Bills continue to rise

Bills continue to rise

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Bills continue to rise

Saving a deposit for a house was never easy, not last year and not 50 years ago and nor will it be in the future. Because of this, most first- time buyers have always had a tough time raising the money to buy a home.

The role of regulation should never be to create winners and losers in an economy  – people tend to do a fine job of that by themselves.

It is worrying that we have taken a once-in-a-lifetime credit cycle and made rules that will distort the market to prevent another one.

This only makes sense if another crash is likely, otherwise you are paying a costly price for insurance against an event with a low probability.

The logic is also false, if we accept that damaging some people for the greater good is OK, then why does anybody oppose the death penalty based on a few innocent people dying?

In truth there is perhaps a resurgence of an Irish need to be subservient to somebody. That somebody can be the church, the local bank manager or the teacher. A deference to power, or in this case academia and State bodies, has always been part of the Irish psyche.

For all the people hurt in the financial crisis, they are dwarfed by the number of people who have had good outcomes, who are not in arrears and who are living happily with their decisions to buy property.

Thankfully, many home-buyers will not see much of a difference with the introduction of these new Central Bank rules, as all over Ireland there are good homes available for far less than €220,000.

But the new rules, which are inherently biased against city dwellers, will naturally upset many people, as city markets, whether it’s Dublin, Cork, Limerick or Galway, are the largest and most popular.

Central Bank Governor Patrick Honohan has implied that people will thank him one day for effectively saving them from themselves. I suspect he’ll be waiting some time for that.

The reason is that you have to see it from the individual’s point of view and not from an ivory tower point of view.

If you wanted to buy a home for €250,000 last week, you could do it with a deposit of €20,000.

In this debate, people keep mentioning 10pc as if it was the norm  for a deposit – in fact, 8pc was widely available from AIB, EBS and Haven.

If you bought the €250,000 home last week, you could have a 20-year loan of €230,000 on day one with a rate of 4.3pc, costing €1,430 per month. Under the new rules, you may have to save up another €8,000, which would be a total deposit of €28,000, made up of 10pc of the first €220,000 (€22,000) and 20pc of the remaining €30,000 (€6,000).

This means you need a deposit of €28,000, which for most people means putting aside all you can for the next year to make up the difference, but you’re likely to be doing this while paying rent, and it’s likely that you’ll be indebted for longer than if you bought last week and will potentially pay more if prices rise, which they are still doing.

We will assume prices stay static (which they won’t, but to keep critics happy) – in a year’s time the buyer puts down €28,000 and they have a loan of €222,000, but they have paid another 12 months’ rent, which at €1,200 a month costs €14,400.

Meanwhile, due to repayments the person who has bought already has a loan balance of €222,580, almost the same amount; they also did not have to spend €14,400 in rent to save the extra €8,000 down-payment difference.

If that kind of saving ability existed, the buyer could pre-pay their loan down faster, but again, we’ll assume they do not.

The first buyer will be out of debt in 19 years; the total cost of the loan for those 19 remaining years will be €326,126. Meanwhile, the buyer who was forced, not of their own choice, but due to decisions made by the anointed ones, to wait, will pay €332,216 over 20 years.

This will mean they have lost €14,400 in rent that really didn’t need to be paid, and which only came about due to the ‘locking out’ effect of the new rules.

 Oh, and if prices rise? It’s even worse, so I doubt many will be queueing up to thank any promoter of these rules, at least not if they were numerically literate enough to be able to pass Junior Cert maths.

Karl Deeter is a financial analyst and compliance manager at Irish Mortgage Brokers

www.mortgagebrokers.ie  

@karldeeter

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