[rahimnathwani]

No. The point of the down payment is to reduce the loan-to-value ratio which, in turn, reduces the risk taken by the bank (as the property value would have to fall by more than the amount of the down payment before the loan collateral is worth less than the loan).

This risk reduction is why the bank will give you a loan at y% rather than 1.5y%. This reduces your monthly payments to an amount you can afford each month from your salary.

[ChuckMcM]

This is exactly correct, loan to value differences change both your APR and whether or not you need private mortgage insurance (PMI). If your loan to value allows the bank to give you their best rate and waive PMI (which they do because they believe if you default they can sell your property at a profit) then you will save a tremendous amount of cash over the lifetime of the loan.

[FireBeyond]

As I mentioned down thread, it's not that easy. Mike Davidson, who sold Newsvine to MSNBC and had enough liquid cash to (more than) cover his mortgage that day in its entirety still went through hoop after hoop even refinancing his loan.

Risk is only a part of the equation here.

[ChuckMcM]

I would be really really cautious about taking anything from Mike Davidson's blog, for one if you notice the dates it was during the worst Mortgage Meltdown in history (july 2008, and may 2009) and he was attempting to get a construction loan which is an entirely different sort of transaction than simply buying a house that already exists.

[rahimnathwani]

I was responding to a parent comment: "The point of the down payment is that you're able make good on the loan."

I don't agree with that statement, as I believe the primary purpose of the down payment is a source of risk reduction for the lender, whose only guaranteed recourse is the collateral on the loan. In the UK, home loan products each have max LTV (loan-to-value) thresholds, and prices are inversely related to those (though not linearly of course). Lenders don't care whether the LTV being less than 100% is the result of years of saving, a gift from parents, a windfall of some kind, or just because you happened to make money when you sold your previous property. They care mainly about the LTV (which affects their downside risk) and the ratio of your regular monthly income to the monthly payments (to make sure you can comfortably afford the repayments).

Do you disagree with my statement, or are you just pointing out that the down payment is only one of the factors which affects the risk of the loan, and that the risk of the loan is only factor which affects the lender's decision?

[thaumasiotes]

If your down payment is a gift, you're supposed to disclose that fact... the lender doesn't consider it equivalent.

[rahimnathwani]

If it's a bona fide gift, the lender will consider it equivalent. If you claim that the deposit is a gift, they may request a letter from the person who gave you the gift to confirm there are no strings attached, i.e. that:

- it's non-returnable

- it's not interest-bearing

- no interest in the property will be retained by the person giving the gift

If they didn't do this, the gifting party could later claim that the gift was in fact a loan, and that it is secured on the property. This could cause complications for the lender, who is relying on a first charge on 100% of the property as security.

[jbooth]

If he had that cash, why didn't he just buy the damn house himself?

[FireBeyond]

To my mind (and I don't know exactly how much) - even $1.5MM at a 3% return would nearly make your mortgage payments without touching the capital, so maybe that's why.