Getting the State to fund 30% of the price of your new home

With property prices remaining surprisingly resilient, albeit against a background of reduced supply, the introduction this year of a new affordable home scheme will be welcomed by many.

The scheme, Affordable Purchase Shared Equity, will see the State take an equity share, of up to 30 per cent, in the purchase of a new home. It is aimed at helping close the affordability gap for those who may earn too much to be eligible for social housing, but not enough to pay the full market price themselves.

It is expected that as many as 8,000 families a year might buy homes on the scheme in the first two years.

Approval was given for drafting the Bill to provide for the new scheme before Christmas and, according to the Department of Housing, the final details of the scheme are currently being negotiated, with a view to its launch later this year.

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So how might the scheme work and what should potential applicants watch out for?

What is the scheme?

Against a background of persistently high house prices, strict rules on how much you can borrow and an inadequate supply of homes, securing a home, particularly in the more urban areas of the State, remains very difficult. And it’s unlikely to get much easier in the short-term, with Covid-19 related stoppages in construction, and house prices expected to rise further.

To counter this, and to try to boost the supply of homes in the sub-€400,000 category, the Government is set to launch an affordable purchase scheme this year, which will see mainly first-time buyers acquire a 70 per cent stake in a new home, with the Government acquiring the rest.

The big advantage for homebuyers is that they will be able to borrow more than they traditionally could through a standard home loan, which means that buying a home may actually be affordable for the first time for many.

The reason the Government is going down this road is likely because of difficulties with directly subventing homebuyers due to EU state aid rules.

Who can apply?

While the exact details on the new scheme have yet to be worked out, it's likely to closely mirror the UK's Help to Buy equity loan. According to the department, it will be open to all newly built homes, "subject to regional price caps", with a ceiling of about €400,000 expected for Dublin.

In its proposals last year, Property Industry Ireland (PII) – the Ibec lobby group representing the property sector – suggested a higher price cap on apartments of €485,000, versus €425,000 for houses, in Dublin.

The scheme will be aimed predominantly at first-time buyers, although Minister for Housing Darragh O'Brien recently said there will be "some exceptions". Applicants will have to live in their homes, with clawbacks likely applying should they need to rent the property.

It had been expected that salary caps would apply – something in line with those applicable under the existing Rebuilding Ireland Home Loan, of €50,000 for a single person and €75,000 for a couple. However, Mr O’Brien recently said that there will be “no arbitrary salary caps”, which will allow eligibility for the scheme to vary from time to time.

How does it work?

In essence, the scheme means that putative homebuyers will buy a property with two other stakeholders: their lender, who will own a majority share in the property, which will be repaid over a specified time frame, and the State, which will own a stake worth up to 30 per cent.

In the event of default, the mortgage lender will retain the right to first recovery.

Think of it as having two mortgages. The first will be obtained from a mainstream lender, and borrowers will likely be required to borrow as much as they can from this source. The second, the State’s stake, will be interest-free for the first five years, with a fee kicking in in year six. A figure of about 1.5 per cent has been mooted for this; in the UK, for example, it’s 1.75 per cent, but this rises by inflation plus 1 per cent each year.

In its report, which is based on an interest rate of 1.5 per cent, Property Industry Ireland give an example of a couple earning €75,000 a year. At present, with a 10 per cent deposit, they could only qualify for a home worth €291,500.

While a substantial amount, it would put them out of reach of many new homes in Dublin; a search on Myhome.ie for example, found only three new developments in Dublin with properties selling for €325,000 or less, in Clongriffin and Balbriggan.

With the State also taking a stake, however, they could look at homes in the €350,000 to €400,000 price bracket.

Buying a home worth €340,000, the couple would have a mortgage of €262,500 (3.5 times income), a deposit of €34,000, with the equity loan part held by the State equalling €43,500, or 13 per cent.

In the first year, repayments would be €1,095 a month based on a mortgage interest rate of 2.85 per cent. From year six onwards, a rate of 1.1 per cent will apply, which means a monthly €40 charge, pushing the mortgage up to €1,134 a month.

What about the equity stake?

The equity stake can be bought out by the purchasers at any point, thereby boosting a homeowner’s equity in the property. It doesn’t have to be, however; there is no obligation to repay the loan until the house is sold.

However, applicants may want to pay down this equity stake. If, as is the case in the UK, the interest rate rises each year, the fees on the equity part of the loan can rise significantly. For example, figures from moneysavingexpert.com show that equity loans become increasingly expensive after about 15 years.

Interest paid on a standard mortgage on a property worth €200,000 comes to €19,315 after 25 years – but hits €31,770 on an equity loan. This means that, if kept for the long term, the equity loan product can end up more expensive than a typical mortgage.

As a result, applicants should expect to benefit most from this scheme if they can pay off the equity loan within the first five years, before the interest kicks in. Of course, if they could afford to do this in the first place, they wouldn’t need the affordable home product.

In the UK, so-called “staircasing” allows homeowners to partly repay their equity loans over time, while many homeowners will seek to remortgage after five years, thereby buying out the State’s stake. This will of course depend on whether or not they will be able to afford more expensive repayments, and whether or not their lender agrees to a remortgage.

In addition, applicants need to remember that the equity stake is based on the market value of the property. So, if house prices go up, the amount outstanding goes up; if prices fall, so too does the euro value of this stake. A 30 per cent stake which was originally valued at €90,000 could jump to €120,000, or fall back to €65,000, for example.

What about Help to Buy?

It’s expected that homebuyers will be also be able to avail of the Help to Buy grant to help fund their purchase. This means that qualifying first-time buyers will be able to get tax back of up to 10 per cent of the purchase price of their property, up to a limit of €30,000. A ceiling on the purchase price applies, of €500,000, but this is unlikely to affect affordable home loan scheme applicants.

Overall impact

While many potential homeowners may welcome the new scheme, others may question how “affordable” it will end up being. After all, with supply still lagging demand considerably, revving up the demand side of things is likely to have only one outcome: higher prices.

This is what Robert Watt, the outgoing secretary-general of the Department of Public Expenditure, advised the Department of Housing, when he wrote that "the property industry want an equity scheme because it will increase prices".

The fear is that intervention by the State makes an already overheated market even hotter, boosting demand that is already buoyant based on recent mortgage approval figures at a time when supply is constrained.

While there is development in the pipeline earmarked specifically for the scheme – the former Irish Glass Bottle site at Ringsend in south Dublin is earmarked for more than 600 affordable homes, for example – in many cases those qualifying for the affordable scheme will be chasing the same properties as those in the main market.

Figures from Irish Institutional Property – the lobby group for the big institutionally funded property players – last year found that, with the State taking a stake of 25 per cent on the sale of a new home, an additional 14 per cent of households would be brought into the affordability threshold for a home. The report from Property Industry Ireland said the so-called "locked-out generation" accounts for about 440,000 households in Ireland.

While enabling more households to buy their own home should, in principle, be welcomed, the worry is that while the scheme may initially make homes more affordable, it will push up prices even further. So rather than make homes more affordable, in the long run it will ultimately make them more expensive.

Some argue that this is what has happened in the UK, with overall prices up by 38 per cent since 2013. Moreover, a report from the National Audit Office found that almost two-thirds of buyers in the scheme in the UK could have bought without it.