Many people believe that they need a 20% deposit to qualify for a mortgage loan and purchase a home. However, this is simply not the case. The deposit that someone needs to qualify for a mortgage depends on what category of buyer they fit under according to the Central Bank of Ireland. There is also some gray area that the Central Bank of Ireland gives banks when it comes to lending above the limits that have been set.
Central Bank of Ireland
The Central Bank of Ireland instituted various mortgage measures early in the economic cycle of 2015. These measures were introduced as the housing market was beginning to recover from the financial crisis. The purpose of these mortgage measures is to ensure that lenders lend out money in a sensible manner. Additionally, these measures were created to prevent home buyers from taking out loans that they can’t afford, thereby accumulating significant debt.
The measures have two types of limits: Loan-to-Value (LTV) and Loan-to-Income (LTI) limits. The LTV limit determines the deposit amount a borrower is required to have based on the category of buyer that they fit under. The LTI limit determines the amount that you can borrow, and it is based on your income.
The LTV limit divides the population into three categories: first-time buyers, second and subsequent buyers, and buy-to-let buyers. First-time buyers are required to have a 10% minimum deposit, second and subsequent buyers are required to have a 20% minimum deposit, and buy-to-let buyers are required to have a 30% minimum deposit.
Therefore, the notion that you need a 20% minimum deposit to qualify for a mortgage is incorrect. First-time buyers only need a 10% deposit, because the bank understands that they do not have equity in a property that they can use to help pay for their deposit.
The 20% deposit rule is also not always applicable for second and subsequent buyers. It is possible to get an exemption from the bank that would allow you to have a lower deposit. However, exemptions are rare and can be difficult to get. Exemptions are given to borrowers depending on their overall creditworthiness, mortgage application, and if the lender has room to offer an exemption. Additionally, borrowers with higher incomes are more likely to get an exemption from the lender.
You don’t necessarily need a 20% minimum deposit to qualify for a mortgage loan. The minimum deposit required depends on the buyer category and whether you get an exemption from your lender.