The Rebuilding Ireland Home Loan scheme
The Government announced a new scheme to make a greater number of mortgages available to first-time buyer (FTB) individuals and couples. The Rebuilding Ireland Home Loan scheme is a Government-backed mortgage-initiative allocated with €200 million to be made available to individuals earning up to €50,000 gross per annum, or couples earning up to €75,000 gross per annum.
The funds will be administered through local authorities and applicants will have to have been previously refused a mortgage by at least two banks. The mortgages are targeted at homes of up €320,000 in Dublin, Cork and Galway, and €250,000 in rest of the country; although applicants must have a deposit of at least 10% of the property price.
Reactions to the new scheme have been mixed to-date. As a demand-side action, the measure has been criticised as likely to inflate prices in the short-to-medium term. Increasing the availability of finance in the market will act to create greater demand and competition for a limited number of houses and apartments, particularly in urban centres. Any demand induced supply will take time to become bricks and mortar.
Some commentators have referred to the package as ‘sub-prime lending’, aimed at members of society who may struggle to repay the mortgages in the future. Such lending practices were partly attributed to the economic difficulties of the USA from 2007 to 2010. However, the Rebuilding Ireland Home Loans will be structured so that repayments will not exceed approximately 33% of an individual or combined couple’s disposable income. The 33% standard is regularly used as a measure of ‘housing affordability’ or ‘housing stress’. Arguably, this is a relatively responsible lending approach, but means a borrower could get a loan of up to 5-times their gross income.
Interestingly, the new loans are at odds with Central Bank of Ireland restrictions otherwise imposed on mortgage lending: maximum of 3.5-times gross income and up to 90% of property value for FTBs (except for a limited number of less risky applicants). This appears to penalise many people seeking a mortgage. For example, an individual earning €50,000 (under the threshold) will be able to avail of a mortgage through the scheme of just over €251,000. However, an individual earning €51,000 (over the threshold) would only be able to secure a mortgage of €178,500 through a bank (3.5-times gross income) – a difference of €72,500. An individual would need to be earning over €71,700 to avail of a mortgage of €251,000 through a bank. The new loans indicate the advocation of contradictory lending policies by the Government. Clearly it creates an unequitable situation, with the new Rebuilding Ireland Home Loans indirectly restricting the relative purchasing capacity of individuals and couples earning above the thresholds who may ultimately be priced out of the market.
Positively, the new scheme is proposing interest rates as low as 2% per annum, markedly lower than commercial banks. This should place pressure on them to reduce their rates – although the total size of the Government’s €200 million pot is less than 5% of the €5.4 billion approved to FTBs between January and November 2017 and just over 8% of the €2.4 billion drawndown by FTBs between Q1 and Q3 2017.
Even with applications to be accepted from 1st February, many questions remain unanswered, including:
- Will different household types by prioritised (individual v single-parent v couple)?
- Will mortgages be restricted to particular property types and sizes?
- For couples living in two different local authority areas, who decides which local authority area the can be utilised in?
- Will the fact that you may only apply to the local authority within which you live be rigidly enforced?
- How can an applicant knowingly fill in the details of the property they are going to purchase [required in the application form] if they do not know if they will be approved and for how much?
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