What is a down payment and what cannot be used as one?

What is a down payment?

A down payment on a mortgage is your contribution toward financing the purchase of a property. Without it, you will not receive the remaining amount required to finalize the transaction you are applying for. For simplicity, the down payment is expressed as a percentage. Currently, in accordance with Recommendation S issued by the Polish Financial Supervision Authority, twenty percent is required, although you will find bank offers with requirements as low as ten percent or as high as thirty percent.

What can count as a down payment?

Although we usually think of cash in a bank account when we talk about a down payment, that is not the only option. Despite the convenience and popularity of this method, there are several other ways to provide a down payment:

• a plot of land on which a house is to be built;
• the value of construction work already completed;
• another property;
• a gift from immediate family (this is tax-exempt if you report it to the tax office);
• withdrawal of funds from Employee Capital Plans (PPK) — note that although the money is yours, it must be returned to the PPK between five and fifteen years after withdrawal to avoid taxation;
• funds accumulated in IKE and IKZE accounts.

Each bank may have slightly different internal policies regarding the acceptance of other forms of down payment, but the main rule is that the value of the contribution must meet the requirement. The difference is paid in cash. For example, you and your parents and siblings own a property that you want to buy out from them. Your share is one-tenth — this will be treated as part of the down payment, but you must have the funds to cover the bank's full requirement, i.e., twenty percent.

A common question is whether a bank recognizes a deposit as part of the down payment. Yes, it does. A deposit is a tool that, in a way, protects the interests of both the buyer and the seller. Although an advance payment works differently, it is also respected. Essentially, both forms of transaction are treated as cash. It is required to record this in the contract and confirm the payment. Whether the deposit fully covers the down payment depends on the agreement between the parties. The seller may require the standard ten percent or a symbolic ten thousand zlotys.

What cannot be used as a down payment?

First and foremost, funds for a down payment cannot come from another loan or credit. You will submit a declaration regarding this, and providing false information can expose you to serious legal consequences. Therefore, if you are thinking about taking out a cash loan for this purpose, forget it. It is not only impossible but also completely pointless—besides the formalities, you would only reduce your creditworthiness.

Usually, banks will also not accept financing through securities, such as stocks or bonds. Although it is theoretically possible, due to stock price volatility, a bank might value them at even half of their current worth. Unless you have the ability to predict the future and your stocks are going to rise by more than one hundred percent, simply selling them now would be more profitable.

Does a down payment reduce the loan amount?

You might wonder whether it is better to quickly take out a mortgage with a low down payment for a property—since, according to popular opinion, they only go up in price—or to save up a larger down payment and pay less?

I don't know the future and I cannot tell you how real estate prices will shape up over the next dozen or so years. However, we can focus on the loan itself and consider whether it is worth taking the path of least resistance or trying to come up with the missing down payment?

Comparing the offers, the conclusion is simple—you pay fifty thousand zlotys more upfront, and you pay back 74,839.14 PLN less. That is nearly twenty-five thousand zlotys in savings. However, the table above does not reflect reality.

Down payment vs. margin

While banks do accept a ten percent down payment, you will pay for it with a higher margin. For the bank, this is a "premium" for risk, which it needs to profit from. The table below compares two real mortgage offers from the same bank. This time, after an interest rate change.

The difference is 133,121.06 PLN, which, when putting down an extra fifty thousand zlotys at the start, means savings of over eighty-three thousand zlotys. That is a truly significant amount.

Such differences in margin, and consequently in interest rates, occur between a ten percent and a twenty percent down payment. This is a premium for the bank for a low down payment, but it does not work the other way around. Offers for twenty and even fifty percent down payments can be identical in terms of margin, as in most banks there will be no difference at all.

So, remember that although you can take out a mortgage with a low down payment, its costs will be significantly higher, and it is worth looking for a solution to this issue.