Are banks restricting low LTV mortgages, despite low risk?

I’ve come across a situation where a woman is trying to get a mortgage to buy a house worth 300K for 120K, off her mother, of course!

The banks are telling this woman they don’t want her business. This person is sensible, debt-free, clean credit sheet, secure job, the works. The amount she wishes to borrow is under the 3.5 x salary limit.

I thought I understood banks, but this has me :question: .

Isn’t this basically among the lowest-risk mortgages in Ireland? She’s presumably no more or less likely to default than any other borrower. Ergo she is no worse a risk than anyone else. So presuming she defaults, and they start the repossession process, they have a really good chance of recouping their losses in full. Ergo she is a better risk than anybody else.

I must be missing some part of the picture. There must be something that motivates this, I’m just a little confused what that is.

I assume it’s not sustainable for a bank to continue indefinitely issuing no new loans to new customers. Am I wrong there? Can a bank survive without issuing new loans for decades, without shrinking the business massively?

CGT materialises on transfer by sale or by gift. Address that point satisfactorily and go back to bank.

Isn’t that the seller’s problem, as she is the one disposing of the asset? I don’t know all the details, but I don’t see how capital gains tax applies to the borrower.

If the buyer has already been gifted from the seller bringing them beyond the threshold then the bank will have no property on which to claim as the revenue commissioners will be top of the line.

I wouldn’t loan to a borrower like that as I’d fear I’d have nothing to which I could attach the loan. If it sounds iffy then no lender will proceed further. This sounds iffy even if it isn’t.

Still confused. The threshold for the buyer is 225K, because that’s the lifetime gift. So recipient’s tax liability is zero due to first 225K being exempt.

I expect all tax details are taken care of in the deal. I can’t see what is the problem with being able to attach the house. The Revenue has no business with the buyer.

As for the seller’s tax liability, well: she’s getting paid 120K by her daughter and I assume she’ll pay what she owes out of that.

Who says? Who proves it? Revenue is always first in line…always…and they’ll get their slice before everyone else.
no lender needs hassle and this sounds iffy.

Here’s a forinstance: if the mother and daughter contract a reputable firm of auditors to fully explain the tax liability in full, and the auditors sign off stating that the deal is going to be fully compliant and the bank’s interests would not be threatened, would that make a banker more amenable to signing off?

Isn’t that what auditors do, more or less? So the answer to “says who?” is “says these highly-trained experts”.

an auditor audits what exactly? A transaction which hasn’t taken place. The banks have a ton of bad loans from the last time they went loo-lah why would they want to get potentially more from such a non-standard transaction.

I thought bankers worked from carefully constructed criteria, formulae and algorithms, you seem to be saying they don’t actually do any checking and just follow random hunches.

Hey, if that’s how it is, no wonder the boom and bust.

You have to admit, “iffy” is an amazingly imprecise, nebulous word. You’re seemingly concerned about some assumed tax problem, and I don’t understand where you’re getting it from. Virtually any property transaction might potentially involve some tax evasion, and I’m not clear on what makes the above claim so much more iffy than any other transaction.

Now, it could be that you have an excellent reason to assume that there is some scamming going on, but it really appears that the assumption is based on zero evidence. Hey, for all I know it is a tax scam of some kind, but I really doubt it. It seems like the Revenue would probably check those things quite carefully so the chances of pulling it off are low, so why try?

But aren’t forensic accountants supposed to be able to audit a person and detect this activity or declare her clean? I don’t see why it’s not in everybody’s interest to involve a 3rd party accountant to sign off on the tax affairs being in order. The borrower can pay the fee. Bank knows that tax is OK. Borrower gets house.

I’m not engaging any further.

An auditor can place funds in escrow to pay the Revenue all taxes owed, and sign off on that transaction (meaning the money moving into escrow).

Are you working from any data on this? Was there a lot of tax scamming done in the boom?

Aren’t the bad loans nothing to do with Revenue, but rather the courts putting an almost total stop to the repossession process?

If I’m wrong, can you point me at evidence that Revenue is a primary obstacle for recovery of debt for a significant quantity of loans?

The f**k-up of the boom years was lending at 100% loan to value, to people who were telling lies about their incomes.

This is not that.

Did you really engage at all?

Three points:

  1. A very low mortgage doesn’t make much money for the bank, there’s a fixed cost of admin and paperwork and legal for the bank to recover. It takes longer to recover the money and the low LTV attracts low interest margin. So why lend 4 people 120k when couples are queuing up to borrow 480k - more interest at higher LTV for less fixed admin cost.

  2. Proof of savings isn’t about the deposit, it shows significant ability to pay above the cost of rent/mortgage, a simulated stress test if you will.

  3. You can’t just sell your kid a house for way under market value. This is a gift of 180k. Revenue needs to be informed of a transfer of part of the asset, then there’s a chain to buy the rest from the mother. It’s legally more complicated than a straight sale, see point 1 about cost for the bank to proceed.

It’s not that the banks aren’t lending, it’s that they don’t need to lend to your friend because it’s less worth it. Profitability is just as important as solvency

There’s no right2mortgage just for meeting the criteria, and unless it’s omitted accidentally in the op, your friend doesn’t meet the 6 months saving criteria. This is a more complex arrangement proposal than you’re assuming

It seems an odd arrangement. Where will the mother live with only 120k from the sale? Does she represent some kind of burden on the buyer? Will she continue to live in the house? Why aren’t they using a more tax efficient means to transfer the property?

It may simply be that the buyer’s bank can’t answer these questions because it has no relationship with the seller.

Not a friend. Like I said, for all I know she might be playing some scam, I just reckon it’s not likely.

1 makes a certain amount of sense, and although it’s less money for the bank, it’s still guaranteed profit, at tiny risk, so although it’s a much better explanation than “iffy”, I think you can see the flaw. Lending 480K to one couple is hundreds of times more risky for the bank? If they default and there’s the 8 year repossession process the bank’s chances of recovery of all its money is zero. They will recover pennies on the euro.

Revenue allows people to get a lifetime gift of up to 225k tax free from their parent. The tax liability is €0.00.

She has about 20k saved to do up the house the way she wants. I would have mentioned it if she wasn’t saving. I’m not a complete fool.

It bothers me that banks which I bailed out are turning up their noses at risk free profit. Message to bailout recipients: when somebody offers you free money with no risk, take it!

I’'m pretty sure this is the main point and it’s been this way for a long time. In the boom you couldn’t get a 100k mortgage for a house you wanted to live in - the bank would guide you towards a personal loan or (seriously) the Credit Union. The interesting thing was you could get a 100k (or less) mortgage for a holiday home. This makes me think that the issue is with the legal framework around a PPR. I had a friend in a similar situation (they and their partner had two houses to sell and only needed a small mortgage) - in the end they found a lender willing to give them the small mortgage - I think the lender was EBS. One solution I suggested to them was to take the bigger mortgage and pay a big chunk off it after they got it - not sure if your friend would be willing to do that.

Ah, but banks are not risk averse. They chase profit, and will load themselves up with as much risk as regulators allow, as we have seen amply demonstrated in the last 25 years.

Also, remember that mortgages get packaged up into securities after a couple of years. It’s all well and good having a low LTV mortgage on the books if it’s non-performing and can’t be shipped on in derivatives by the bank. There’s no “Ah sure don’t worry about repayment capacity, we can always get our money back in the house”. Mostly likely the daughter would be crying to anyone who’d listen about being kicked out of a house her mother helped her buy if she lost her job and couldn’t pay.

Nevertheless, it’s a gift and transfer that has to be processed. This means there has to be an actual conveyancing of part of the house to the daughter, probably with a stamp duty return, and if there’s moneys owed this has to be agreed by mortgagee institution currently owed money by the mother (the current mortgagor). If there’s a mortgage, the mother is asking to transfer the bulk of her equity to her daughter, based on a promise that the daughter will borrow money to buy out the rest of the share. What incentive dues the current mortgagee have to facilitate this? They’d probably just say “sell the whole house to your daughter instead”

Then, after the free transfer of N% of the house is completed, a return (even if it’s zero euro) has to be made to the revenue commissioners.

The gift cannot be conceptually transferred, it has to happen as cash or a transfer of ownership of assets.

No need to be tetchy, it was pertinent information you omitted, and you were the one asking why she may not have been loaned the money.

She should put that 20K in as skin in the game and try again.

LTV isn’t the only measure of risk. There’s the risk of having to recover the asset with 5 angry former developers turned debt champions outside the house and a story in the Indo about the house her mother raised her in being taken away by the bailed out banks.

I’m delighted that the bailed out banks are concentrating on profit within regulated risk guidelines. This ensures a speedier pay back of the bailout money.

The bank has a limited amount of money to lend. It makes sense to lend this in the most profitable manner. If they need to bring down the overall LTV of their loan book, spending their administration on 120K mortgages isn’t the way to do this profitably.

The lending criteria are guidelines, not a guarantee of qualification. Some people will still get turned down if the bank doesn’t want or need their business.

It’s ludicrous to assume there was no savings. You also appear to assume that she didn’t offer to put up that 20k as skin in the game.

Why did you think such an assumption was logical?

Obviously, as nobody involved is a drooling moron, she offered to use the 20k savings as a deposit, and the banks said “sorry, it makes no difference.”

Is this really such an odd arrangement in Ireland? I recently met up for pints with my school friends. Literally every one of them had bought their houses with money from their own parents and/or their wife’s folks.

I believe you are mistaken about the supposed legal problems with gifting. My understanding is that hundreds of houses are sold every year by parents to children at extremely below market price. The Revenue deals with this as a matter of routine. If tax is owed, it is paid.

As for non tax related legal issues, I require better evidence that they exist.There is no law that bans the sale of an asset to a child. I could be wrong, but I would ask people to cite the applicable act or case law if they are so certain.

If you are right, there certainly will be proof of this in the public domain.

I assume that since nobody involved is a drooling moron the option of the mother getting a 160k equity release mortgage has been considered and rejected…