How much can i borrow

princeofpounds

So if you have a large deposit and are willing to take a longer mortgage isn;t it reasonable that you could be leant more money and have the same monthly repayments? (obviously i understand that over the life of the mortgage a 30 year one will be more expensive).

The interest rate reduces with larger deposits because the risk premium component of the mortgage shrinks - the lender needs to charge less of a profit margin to insure against not having enough collateral to cover the entire loan if you default.

However, the benefit of this diminishes as you add more deposit. This is because the risk premium is only part of the cost of a mortgage - they need to add their own cost of funding (the deposits they take in very basic terms) and a profit margin.

So let's say that their cost of funding is 1%, and the profit margin is 2%.

If a risk premium for a 10% deposit is 2%, the total cost of the mortgage is 5%.

If the deposit is 50%, you might be effectively zero-risk, but the cost of the mortgage will still be 3%.

If the deposit is 70%, you get no additional benefit, as you can't be less risk than effectively zero!

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Extending the term is a similar issue - you make the repayment portion of the mortgage ever-smaller, but as it shrinks relative to the size of the interest-only portion of the cost (which won't change as part of this process) then it becomes less and less beneficial.