Mortgage scheme: who is eligible and how will it work?

Teachers, nurses and other low to middle income earners can circumvent Central Bank lending rules at lending rates of as low as 2%


Hot on the heels of retaining the Help to Buy grant, the Government has today launched another demand led initiative aimed at helping putative home-buyers, who it says would otherwise be locked out of the housing market, get their first home.

The home loan scheme, which will come into play on February 1st, is aimed at first time buyers with low and middle incomes, with annual salaries of up to €75,000. While the scheme offers cut-price lending rates, starting at just 2 per cent fixed for 25 years, its big attraction perhaps is that it will allow home buyers to circument the Central Bank’s tricky income multiple rules, which have made it difficult for many to buy at a time of rapidly rising prices.

So how does the new scheme work and who is it aimed at and how does it differ from Help to Buy?

What is the new scheme?

From February 1st, local authorities across the country will be offering Rebuilding Ireland home loans, a Government backed initiative which aims to offer low-cost mortgages to purchasers who have difficulty in securing finance from the main lenders. Unlike the Help to Buy grant, which is restricted to new homes, the new scheme can be used to purchase a new or second hand home, or finance the construction of a self-build.

Who is eligible?

To qualify for a low cost loan, you must be a first-time buyer (this will exclude you if you have previously bought a property abroad) and earn no more than €50,000 (single applicant) or €75,000 for a couple. If applying as a couple, the first applicant must be in “continuous”, as opposed to permanent employment, for two years and the second applicant for one. Self-employed applicants will need to provide two years certified accounts. You must also have proof that you have been turned down for a mortgage, or were offered “insufficient” finance, by two lenders.

How much money is available?

The Government has set aside €200 million for the loan scheme this year, but it may be extended next year if it’s a success. Given the surge in house prices, the fund is only expected to fund about 1,000 house purchases this year, at an average loan of €200,000.

How much can I borrow?

In line with Central Bank rules, borrowers will be able to borrow up to 90 per cent of the purchase price, up to a maximum purchase price of €320,000 in Cork, Dublin, Galway, Kildare, Louth, Meath and Wicklow, and €250,000 in the rest of the country. So, the mortgage will be limited to €288,000in the former counties, and €225,000 in the latter.

However, of most significance perhaps is the fact that applicants to the scheme will be able to circumvent the Central Bank’s other mortgage lending rule which limits the amount someone can borrow to 3.5 times salary. While 20 per cent of applicants can be exempt from these limits, banks typically offer exemptions to the candidates with the cleanest credit histories and biggest earning potential. In urban areas, particularly the capital, this has made it very difficult for someone on the average salary of about €37,000 to purchase a home, and has been repeatedly criticised by property commentators. The new scheme however allows buyers to sidestep this rule, by offering mortgages on the ability to service their debt. Local authorities are able to do this because, as unregulated financial providers, they are not subject to Central Bank rules.

According to Conal MacCoille, economist with Davy Stockbrokers, the key affordability constraint under the new scheme is a debt to service ratio of 33 per cent - ie no more than 30 per cent of a borrowers’ income should go towards servicing their debts. This means that with low 2 per cent interest rates, borrowers will be able to take out loans equivalent to five times their income

For example, a single person on a salary of € 40,000 will be able to borrow up to €198,000 (ie 5 times income), as with repayments of €858 a month, their mortgage would account for 33 per cent of disposable income. Aa couple on € 75,000 can borrow € 288,000 in Dublin - ie multiple of 4.1 per cent - according to the scheme’scalculator. Factor in hefty personal debts however, and affordability shrinks.

What will it cost me?

The new scheme has some eye-wateringly low interest rates, which, one would hope, might exert a little bit of pressure on the main lenders to move their rates down further. For example, borrowers will be able to fix their mortgage repayments for 25 years at just 2 per cent, or 2.25 per cent over thirty years. For those looking for a variable rate, it will start at 2.3 per cent for up to 30 years.

Is this much cheaper?

Without a doubt these rates are far more attractive than anything on offer from the main lenders. Consider a €148,242 loan over 25 years at 2 per cent. Monthly repayments on this loan will cost € 628.33, whereas a loan from a traditional lender at a rate of 3 per cent would cost €702.98 a month. A loan for €288,000 will cost €1,220.70 with the scheme, or €144 more, at €1,365 a month, based on an interest rate of 3 per cent.

Can I get Help to Buy and the new mortgage scheme?

The new scheme is available for both new and second hand homes, so first time buyers will be able to apply for the 5 per cent tax Help to Buy rebate through the Revenue Commissioners, as well as applying for a low cost mortgage through this scheme. This has been confirmed by the Department of Housing.

Where do I apply?

The new scheme is being offered by local authorities right across the country, and from February 1st, applicants will be able to download an application form and submit it through their local office. The application process is expected to take between 4-6 weeks.

What is the new Affordable Purchase Scheme?

The Government has also announced a scheme which will see affordable homes built on State land, in co-operation with local authorities. These houses will then be made available for purchase to those eligible for the home loan scheme, although the State will retain an equity share in the house, relative to the discount from the full price. Construction is expected on four sites in Dublin by the end of the year, with an expection of 10,000 homes eventually being provided through this scheme.

Previously, local authorities purchased properties from developers (who were obliged to offer 20% of properties to affordable or social housing) at reduced market rates, and sold them onto buyers meeting the affordable criteria for between 30-35 per cent less than the market rate. However, this scheme was abolished in 2011.

What will this do to prices?

Everything suggests that the housing market is booming on the back of a chronic shortage in supply; so offering another demand side measure may just exacerbate the imbalance between supply and demand and put further upward pressure on prices.

This may be particularly true in the market around the €320,000 price level, and in commuter counties surrounding Dublin, which are also eligible for the scheme.

As noted by Mr MacCoille however, given that just around 1,000 loans are expected to be issued in the first year of the scheme, this limited scope may “constrain the inflationary impact on the housing market”.

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