Cantillon: How to soften the blow of a 20 per cent mortgage deposit

The issue of mortgage insurance was considered this week by an Oireachtas committee and many questions were left unanswered.

It has become something of a hot topic given the Central Bank of Ireland’s proposal that buyers (with some exceptions) should have a 20 per cent deposit gathered before being granted a home loan.

One way of softening the effect might be to offer an insurance product that would cover the portion between 80 and 90 per cent of the loan when measured against the value. Borrowers would still be required to have the traditional 10 per cent deposit.

The cost of such a policy? Maybe €2,000 or €2,500. This would be a once-off payment and would cover the first 10 years of a mortgage, which are considered the riskiest period for lenders.

Genworth, a global specialist in this area, said the lenders would pick up the tab and suggested that having this insurance could save banks money on the cost of their funds.

With luck, one might balance out the other. If not, you can be sure the banks will pass on the costs.

It is also unclear if the State intends to underwrite such a scheme.

None of the main banks, nor the Central Bank of Ireland Governor Patrick Honohan, seem too pushed about the idea. All of them were asked for their views when before Oireachtas committees in the past couple of weeks and stated that the experience from other markets is mixed, and that it's hard to make a judgement in the absence of the fine details.

Mortgages are long-term products and we need to be certain that the insurer will still be in business years down the road when claims are lodged.

Such insurance policies are not new to the Irish market. Between 2001 and the crash, Genworth wrote thousands of policies. Angel Mas, an executive with Genworth, told the committee it had already paid out €70 million on these policies, with another €40 million due. This is more than the income taken in on the policies.

Having suffered a bad fall, why would it be interested in getting back on the horse?

Genworth and its competitors would like a compulsory scheme introduced this time around. It makes perfect sense from their point of view. This new era of prudent lending should result in fewer borrowers reneging on their loans.

That equates to a high level of certainty around premium income and fewer payouts. Just the type of business coveted by insurance companies.